Retirement annuities, or RAs, can be a bit of a controversial subject, depending on who you ask.
They’re a savings product that keeps your money until a specified retirement date. To the general population, they are non-negotiable in retirement planning. That’s because the general population are bad at saving and worse at leaving what they do save well alone. The law designs RAs to be absolutely untouchable until retirement date.
RA regulation continues after retirement. They mete the RA out through a life annuity or living annuity policy. These two products (with confusingly similar names) fulfil the same function in different ways. To people who don’t have a firm grip on saving for the long term, retirement annuities are literally lifesavers.
But if we can resist diving into our pile of money McDuck-style, retirement annuities become optional in our retirement plans.
For the FI crowd, RAs might actually not be appealing at all. Early retirees want to access and control their money much earlier than 65. The strict by-law asset allocation of the funds (known as Regulation 28-compliant funds, which qualifies a fund to be an RA in the first place) might be far too tame for their aggressive investing tastes.
RAs and Tax
But there are good reasons to have an RA, and they have everything to do with tax. RAs have significant tax benefits that can help you leverage your tax liability to hurl more money into your future:
- SARS (currently) lets us put 27.5% of all our annual income into our retirement annuities. Up to 350 000 per year (for the big earners out there). If you’re managing to meet that goal, you’re already throwing a third of your income into savings, which is massive!
- Also, SARS will not count that 27.5% (or whatever percentage you manage) toward the money you earned that year. It deducts your contribution and will tax you only on what’s left. So: you earned R200 000, put away R55 000 – you’re only being taxed on R145 000. Your tax bracket, according to SARS 2019 tax rates went down from 26% to 18%.
- ALSO, you get tax refunds! The size of the refund depends on your contribution and the tax bracket you fall into. Contributions x Taxbracket %. So if you earned 200k, you’d be in the 26% tax bracket. If you managed to contribute 55k to your RA and times that by 26%, you’ll get back a whopping R14 300!
- When you are ‘of age’, you can withdraw up to R500 000 in a lump sum without incurring taxes.
- The growth of the fund is tax-free, and you only begin to pay tax as you withdraw it after retirement as your new retirement ‘salary’.
- The tax-threshold for over-65 and over-75 year olds is higher; you’re not paying tax on your retirement income until it exceeds R122 300 per year.
RAs and your retirement plan
So from this list you can probably deduce that I like RAs. I’m all for early retirement, but post-65 is still part of that retirement. As a variable-income earner, I have to take some precautions against future uncertainties. I might feel very confident that my savings habits are iron-clad now, but what about in future?
What if my life drastically changes in some way, or for someone I love? I can make bad decisions under pressure the same as anybody. Therefore I view the untouchability of my retirement annuity as an advantage.
As to how I’m depositing money in my RA, I’m happy to approach it with small, manageable, automated monthly deposits. This seems to work better for my RA and TFA accounts than relying on having a lot of cash lying around by the end of the tax year. Small, regular deposits build up surprisingly quickly. Where possible, I will do a great big lump-sum deposit each February to try my best to touch that 27.5% ceiling.
If you want some compelling reasons to reconsider having RAs in your financial plan, check out Stealthy Wealth’s excellent article.
Where do I buy ’em?
This is playing favourites. Check out Sygnia’s Skeleton Balanced Funds and 10x. If you’re a student and the minimums are tough to meet right now, EasyEquities could make a good starter RA that you can move later.
Article reposted with permission from Drawing Money.