The New tax year has started. If you, like many others, had a sigh of relief when Enoch Godongwana announced tax relief measures in the 2023 budget speech, which included increases to tax-free margins, then you are not alone. Now is the time to start saving by investing in a retirement annuity, even with small monthly payments, or with a large lump sum payment, to reap the rewards of the increases to tax-free savings margins by R50,000. Instead of rushing out to buy luxury or nice-to-have goods, with the economy being unstable and markets being volatile, it would be wise to invest this money – or any other bonuses or cash incentives you receive – in a retirement annuity.
Our weak savings culture is something the government has been trying to address head-on for a few years. In its December analysis, National Treasury said, “Household savings average just above 2% of GDP per annum, most of which is contractual savings for retirement funds. However, aside from the low level of savings for retirement, members tend not to preserve their savings and commonly access them when leaving their jobs. As a result, replacement values at retirement are low.”
A recent BusinessTech poll is another case in point. The poll was conducted on 2 702 readers, with the following alarming results:
This weak savings culture adds extra pressure to the South African economy. On an individual level, not saving for retirement can put family members under severe pressure when most South Africans are already taking strain financially. It’s never too late to start saving. The longer you take to start, the more you will need to save when you do start saving.
There are a wide variety of savings vehicles available on the market today. However, retirement annuities have important benefits that could give you the most favourable outcomes in the long run. Besides setting you up for a bigger tax rebate for the next financial year end, you will be adding to your pool of retirement savings, giving you a better chance of reaching your financial goals for retirement. A retirement annuity is a tax-efficient savings vehicle that has been designed for individuals who want to save more for their retirement over and above their employer’s pension or provident funds. It is also suited to individuals who are self-employed and who would like to save for their retirement in their personal capacity. It is defined as a retirement fund in terms of the Pension Funds Act and therefore governed by the Act as well.
This is probably one of the most important features of a retirement annuity. The total contributions you make towards your retirement annuity during your year of assessment are tax deductible up to these limits:
You can reduce your tax liability by a maximum of R350 000 for each tax year. If your contributions exceed the limits, those non-deductible contributions or lump sums can be carried forward to the next assessment year. If those non-deductible contributions are not used as tax deductions in the following year of assessment, they can be claimed as tax-free amounts against your retirement annuity.
From the day that you purchase your annuity to the end date of the annuity, you won’t pay tax on the investment returns that you have earned. With retirement annuities, you are already investing tax-free money. Just as beneficial is the fact that retirement annuities are exempt from tax on dividends and interest. You don’t pay capital gains tax on the growth of your investment either.
If you start a retirement annuity and you decide to leave your employer, any money that you saved up with that employer can be transferred tax-free into your annuity. If you decide to take that money as cash, you will more than likely be taxed on the lump-sum amount. Instead by transferring your lump sum into your annuity, the tax that you would have been liable for if you had taken cash, can grow with investment returns.
The way a retirement annuity works is that any time from age 55, you can take one-third of your total savings in the retirement annuity as cash, while the remaining two-thirds will then be paid out to you as a regular income. While a retirement annuity does give you the option of cashing out a third of your savings, it is important to remember that this cash may be taxed and it will result in the income you receive from the annuity being less than if you didn’t take a portion in cash.
Since retirement annuities are only accessible from age 55, these funds are invested so that they can grow faster than ordinary savings vehicles. The portfolios they are invested in are determined by the service provider that offers the retirement annuities. Some providers give you investment choices, where you can choose the level of risk you are comfortable with, to grow your money at a pace that matches your unique personal circumstances.
Section 37B of the Pension Funds Act keeps the money you’ve saved in your retirement annuity safe from creditors. This means that your creditors can’t ask you to use your retirement annuity to cover outstanding debts. Although your creditors can’t touch your retirement annuity, if you owe money to SARS or if you must pay a portion of your money according to the Divorce and Maintenance Act, your retirement annuity won’t be protected.
You can stop or reduce your contributions at any time. You can also increase your contributions if you get a promotion or an increase. Even if you reduce or stop contributing, your money will stay invested and will continue to grow. You can also add large or small lump sums to your annuity at any time.
You can set a debit order, one that increases over time or debits the same amount every month and just forget about it until you turn 55. You can leave it to continue until you decide to retire, giving your money more time to grow with investment returns. When you have a debit order that deducts the contribution as soon as your salary is paid, you get used to the amount not being included in your take-home pay. This really is a good way to keep your money secure until you reach age 55 or older.
It can take up to a year, sometimes even longer for an estate to pay money out to dependants. When you start your retirement annuity, you will be expected to complete and submit a nomination form. The money will be paid out exactly as you have stipulated on this form. It may help your family financially during very trying times.
Retirement annuities will start with a minimum contribution ranging between R500 and R1 000 per month or an annual lump sum of between R10 000 and R50 000. This minimum contribution will vary from provider to provider.
Speak to your financial advisor and choose the best way to reinvest additional funds into savings vehicles that will help you to secure your financial future. NMG Benefits has several experienced financial advisors who can help you with all the aspects of saving for your retirement and achieving your financial goals.
The NMG SA Group of Companies are authorised financial service providers t/a NMG Benefits