Black hole or sensible strategy? Topping up Retirement Annuities

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Finding the sweet spot

At this time of the years there is a flood of emails from your investment providers imploring you to add to your retirement annuities (RAs) before the end of the tax year – should you?

That depends on where they are, and how long they have been sitting there.

Insurance platforms: The vast majority of RAs out there are currently invested on insurance platforms: The big boys, Liberty, Old Mutual, Sanlam etc. Most of these RAs were structured to give the broker maximum upfront commission (especially prior to 2007) and any increase in the annual amount and addition of lump sums is likely to expose those additions to penalties should they be matured ‘early’ or contributions stopped. Hint: this practice STILL continues.

Don’t do it.

Rather start a new RA on a LISP platform (Investec, Allan Gray, Sanlam Glacier etc) that doesn’t expose you to penalties. In terms of the pension fund act you can ‘retire from the fund’ from age 55. (No, you don’t have to retire from work at all!). Most of the insurance RAs will lock you in until 65, and penalise you if you want to shut it down earlier. If the RA was started before 2007, you could be penalised up to 30% of the market value of the fund! (Treating Customers Fairly anyone?).LISP platforms usually have a R1000 and R50 000 lump sum minima which might be problematic.

Tax advantages: In addition to the tax rebates you get for investing in an RA (speak to me if you’re unsure of the annual limits) there is no tax levied within the fund. The combination of these two makes them a no-brainer for retirement savings. If you compare two investments, with identical funds on the same platform, the RA will outperform the flexible investment by miles. Yes, the tax will be levied on the ‘annuity’ portion when you retire, but that can be managed and is likely to be lower than the tax rate in your ‘accumulation’ years. Investment in RAs are not subject to estate duty either. Estate duty is levied when assets are over R3.5m (aggregated for spouses to R7m). R3.5m is easier to get to than you think. Add your life policy payouts and the house and you might be there already. That R3.5m abatement hasn’t changed for a few years either. While you will only get rebates up to your annual limit, the excess premiums will be carried forward and pay out tax-free to your beneficiaries should you die before you retire. They are also added to your tax-free lump sum when you retire.

Tax exempt Savings Accounts : These are a viable alternative to RAs, coming 1/1/2015. I have blogged about them recently HERE These will have annual limits BUT will not allow you to roll over your annual R30k limit.

Actions: Find what your annual limit will be this year (I can give you a hand with that, contact me HERE). If you only have insurance RAs, get one on a LISP platform, it’s not going to cost you anymore than you’re currently paying in fees, and will save you from penalties.

Author Dawn Ridler 

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