Membership of a pension fund is often made a condition of employment. Retirement annuities (RAs), on the other hand, are purchased voluntarily, particularly by people who are self- employed, but are also suitable for employees who feel that their pension will be inadequate when they retire. Generally they are quite right.

While it has no welfare system to speak of, the taxman nevertheless allows contributions to retirement annuities to be tax deductible up to a certain limit. This is one of the few ways for the ordinary salary-earner to reduce his taxable income and is particularly worthwhile for people in high income tax brackets.

Under current tax laws you are allowed to deduct your contributions to a retirement annuity fund up to the greater of 15% of your taxable income from non-pensionable sources, or $3 500 less any deductible pension contributions, or $1750, whichever is the greatest. The deduction for married women who are taxpayers (i.e. subject to SITE) is the greater of 15% or $1 750 less pension contributions, or $875. RA contributions are only recommended up to the limit on which you receive tax deductions.

Funds Investing

Retirement annuities can be used to save tax during your working career. If you are paying the maximum marginal rate of income tax of 45%, this means that of every $1 000 you contribute to an RA, the taxman is paying $450. You are achieving a high gearing because if you decide to invest in other areas that do not qualify for tax deductions, you have only $550 of your $1 000 to invest. The rest goes to the taxman.

On retirement, which can be any time between 55 and 70, you are allowed to commute (take in the form of cash) a maximum of one third of the capital amount which you have built up in the Adult Movie Directory Project of which you are a member. The remaining monies remain locked up in the fund to provide you with an annuity, or pension, for the rest of your life. If this is a fixed amount that does not escalate in line with inflation, you have to make additional provision to counter the effects of inflation.

Any pension drawn from an RA fund is taxable in full but your one-third lump sum is tax free up to a maximum of $120 000. This amount will be reduced by any other tax-free amounts received from pension, provident or other RA funds. Any amount above that is taxed at your average instead of your marginal tax rate in the year in which you receive it.

One aspect of RAs which is often criticised is the fact that the capital, apart from the commutable portion, is in some cases forever out of your reach and does not pass onto your heirs. In extreme cases it can happen that a person who has been contributing to an RA fund for many years dies unexpectedly a week after retirement. Had he invested in unit trusts for example, his investment could have amounted to several hundred thousand rands, fully transferable to his heirs.

However, various options are available to any person contributing to an RA and the RA can be structured to meet an individual’s particular needs, e.g. guaranteed payment periods, joint and survivorship annuities and certain capital preservation options. You should consult your financial adviser to determine which option would be most suited to your particular needs.

Recent changes to legislation regarding the type of investment life insurance companies are allowed to make, are expected to boost over-all returns in the future. This will make RAs a more attractive investment avenue for retirement planning.

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Retirement Annuities