Secure your future: Direct your tax rebate into a retirement annuity

Published May 7, 2024

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By: Stian de Witt

NOW that the tax year has come to a close, many individuals are anticipating significant tax rebates. Rather than hastily splurging on non-essential items, especially in an uncertain economic climate with volatile markets, consider investing along with any other bonuses or cash incentives – in a retirement annuity.

In South Africa, a pervasive lack of savings discipline persists, posing challenges for both individuals and the economy at large. Considering this weak savings culture, investing in retirement annuities emerges as a strategic choice. These vehicles offer significant advantages for long-term financial planning, including tax efficiency and potential for substantial growth.

Tax deductibility: Contributions to retirement annuities are tax-deductible, with limits set at R350 000 or 27.5% of the greater of remuneration or taxable income. Excess contributions can be carried forward, providing additional tax benefits in subsequent years.

Tax-free investment returns: Investment returns within retirement annuities are tax-free, including dividends, interest and capital gains, providing a favourable environment for wealth accumulation.

Tax-free transfers: When changing employers, funds accumulated within employer-based retirement schemes can be transferred tax-free into a retirement annuity, preserving tax benefits, and enabling continued growth through investment returns.

Retirement income: At the age of 55, retirement annuity holders can access one-third of their savings as cash, with the remainder providing a regular income stream. While cash withdrawals may incur taxation, the remaining funds offer a reliable source of retirement income.

Investment growth: Retirement annuity funds are actively invested to facilitate accelerated growth, typically outpacing traditional savings vehicles. Investors may have access to a range of investment options tailored to their risk tolerance and financial goals.

Creditor protection: Retirement annuity funds are safeguarded from creditors under Section 37B of the Pension Funds Act, ensuring asset protection even in the event of financial difficulties.

Flexibility: Retirement annuities offer flexibility in contribution levels, allowing for adjustments to suit changing financial circumstances. Contributions can be increased, decreased, or halted as needed, while existing funds continue to grow.

Security: By automating contributions through debit orders, individuals can secure their retirement savings until the age of 55 or beyond, providing peace of mind and long-term financial stability.

Estate planning: Retirement annuity funds bypass the probate process, providing expedited access to beneficiaries and ensuring timely financial support during challenging times.

Cost efficiency: With minimum contributions starting as low as R500 to R1 000 per month or annual lump sums ranging from R10 000 to R50 000, retirement annuities offer a cost-effective means of building retirement savings.

Consult with a financial adviser who can provide guidance on maximising the benefits of retirement annuities and achieving long-term financial security.

* De Witt is the head of financial planning at financial advisory firm NMG Benefits.

PERSONAL FINANCE