RAs and medical expenses

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RAs and medical expenses
Save for your post-retirement medical
aid contributions with a retirement
annuity fund
experts believe that you can incur 60% of your lifetime medical expenses in the last five years of your life.
It is one of the largest expenditure items a retiree can
face.
Recent statistics show that less than 10 percent of
people retire financially independent. In other words,
only about one in ten people can look forward to a
‘golden retirement’. There are a number of reasons
for this. One of the most important is that when saving
for retirement, people under-estimate how much
they’ll have to pay for medical expenses during their
retirement years. This is made worse by the fact that
life expectancies (other than among those affected by
HIV/Aids) have increased dramatically in the past few
decades thanks to improvements in medical science
and health care.
The expenses of a comprehensive medical aid scheme,
together with direct and indirect expenses not covered
by medical schemes, can eat a large hole into a
retiree’s pension income. That’s why it’s advisable to
plan in advance for your post-retirement medical aid
expenses. There are a number of ways you can do this
– one excellent way is using a retirement annuity fund.
The cost of living a long life
Women are particularly vulnerable to the financial risks
that longevity may bring, as they live – on average –
seven years longer than men. In South Africa, most
retired men are expected to live to about seventy years,
while retired women are expected to live into their
early eighties. Paradoxically, while life expectancies
have increased dramatically, people are retiring earlier
as companies decrease the normal retirement dates
of their employees. If you retire at age 60 and live until
you are in your eighties, it means that one-third of your
adult life is spent in retirement.
Not that long ago, if a person was diagnosed with a
severe illness in retirement, it meant that your lifespan
was nearing an end. Nowadays around 80% of heart
attack patients survive, 70% of stroke patients survive
and 50% of cancer patients are still alive five years
after diagnosis.
According to Dr Marius Barnard, if you live into your
70s it is not a ‘possibility’ that you would experience
a dread disease, it is a ‘probability’. Some financial
Post-retirement medical expenses
and your retirement annuity
In the past few years, retirement annuity funds have
evolved into extremely flexible, tax-efficient and
effective retirement planning vehicles that offer
considerable help with post retirement medical aid
funding.
Contributions are tax-deductible
• Contributions to a retirement annuity fund are taxdeductible up to 15% of a member’s non retirement
funding income.
• If a member is employed and is a member of
a pension or provident fund, the portion of the
remuneration on which contributions are based is
retirement funding income. Therefore the deduction
will not be available to that employee if no other
income source is available.
• Often, however, an employee bonus or 13th cheque
is not retirement funding income and 15% of that
bonus is deductible.
• Taxable income from any other income source
is usually non retirement funding income. Self
employed persons who are not pension or provident
fund members should be investigating whether
they are maximising their retirement annuity fund
deduction.
Growth on investments within the RAF is tax-free
• Investors in a retirement fund annuity can invest
in a wide range of portfolios including equities,
bonds, property and cash. Any interest, dividends
and capital gains tax earned on these investments
is tax-free in the fund. This provides the potential of
an enhanced level of growth on retirement annuity
fund contributions.
Buying an annuity at retirement
• Although up to one-third of the retirement benefit
can be taken as a lump sum, the low tax concessions
available on lump sums up to R900 000 will
usually have already been used when retiring from
pension or provident funds. Higher amounts are
taxed at 36%. Therefore when funding for medical
expenditure, an annuity is used to take advantages
of the tax framework that exists.
• Although an annuity is fully taxable in the hands of the
annuitant, at age 65 or later, all medical expenditure
including medical aid scheme contributions are
fully tax-deductible. The new flexibility of retirement
annuity funds allows a person to retire from the
retirement annuity any time after age 55 – you no
longer have to exit by age 70. Therefore you can
continue funding the retirement annuity fund until
you need the income.
• Therefore, at age 65, you could retire from your
retirement annuity fund and buy a compulsory
annuity (monthly pension). If you buy a living annuity,
you can choose to release an amount of between
2.5% and 175% of the capital value each year.
This can be calculated in line with the medical aid
scheme contribution for that year and paid directly
to the medical aid scheme.
• Although the annuity is fully taxable in the annuitant’s
hands, this is set off against the deduction for
medical expenditure allowed to retirees at age 65.
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The net effect
A member’s post retirement medical aid liability for the
period during which the capital of the retirement
annuity fund lasts has been constructed using an
unbroken trail of tax-free funding, namely:
• Tax-deductible contributions
• Tax-free growth within the fund
• Taxable annuity stream which is offset by fully taxdeductible contributions at age 65.
Take advantage of the tax break
When considering your post retirement medical aid
requirements, why not consult your financial adviser to
assess whether you are on track with funding your post
retirement medical expenses, and whether a retirement
annuity fund could be appropriate?
Taxpayers have until 28 February 2011 to take advantage
of the tax concession for the 2010/11 tax year.
Source: Jenny Gordon, Alexander Forbes Legal Services
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