RETIREMENT ANNUITIES
What is an RA?
An RA is nothing more than a one-person pension plan. A person applies to become a member of an RA
fund, which is approved as such by the Registrar of Pension Funds and the tax authorities. No employer /
employee relationship is required to qualify for membership.
RAs are the main savings vehicle for self-employed persons to accumulate funds for retirement in a taxefficient way. They are also popular as a top-up plan for salaried employees who belong to pensions
funds, to close the income gap at retirement.
Smaller employers often choose retirement annuities for their staff over traditional pension schemes,
thereby avoiding the administration and responsibility involved in operating the latter schemes.
10 Ways To Save Tax With An RA
Most people know that contributions to an RA are tax deductible up to a certain maximum, but few
people realize that an RA may actually provide them with an opportunity to save tax in 10 different ways.
These are as follows:
1. Contributions are tax deductible up to a maximum (15%) (i.e. if you fall in the 40% maximum
marginal tax bracket then the Receiver is sponsoring almost half of the contribution towards
your retirement).
2. Disallowed contributions can be carried over to the next year of assessment and, if unused
during the contribution period, can be offset at retirement to increase the tax-free portion of the
lump sum. Any balance can be offset against your income after retirement.
3. The inside build-up of the fund WAS taxed at 9% on gross interest, foreign dividends and net
rental income until the 2007 budget when it was abolished. This benefits all taxpayers.
4. The treatment of lump sums at death or retirement changed with effect from 1st October ’07.
Under the new regime, the taxable portion of the lump sum is taxed at:
-
0% for the first R300 000
18% for the next R300 000, +
27% for the next R300 000, +
36% for the remainder
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The nominal value of your retirement capital at retirement should be R2.7 million to make the
most of the tax benefits provided.
5. You can deduct a further R1 800 per year in respect of reinstatement contributions under certain
conditions.
6. On death, any benefits paid out by way of an annuity are free of estate duty. (This provides a
planning opportunity for the wealthy estate owner to make a large single-premium contribution
to an RA in order to reduce his or her estate for duty purposes.)
7. If you leave your employer and receive a withdrawal benefit from your pension or provident
fund, you can preserve your retirement benefit by transferring it into an RA fund tax-free. Any
withdrawal benefits not preserved will be taxed as follows:
Revenue Laws Amendment Act
Pre-retirement withdrawls from retirement savings
R0 - R22 500
R22 501 - R600 000
R600 001 - R900 000
R900 001 and above
To be taxed at 0%
Balance is taxed according to a sliding scale
To be taxed at 18% of the amount above R22 500
To be taxed at R103 950 plus 27% of the amount above R600 000
To be taxed at R184 950 plus 36% of the amount above R900 001
8. On retirement, you have a choice between a conventional annuity and an equity-linked living
annuity. By choosing the equity-linked living annuity (assuming your risk profile justifies the
decision) you can manage the income you receive (between 2.5% and 17.5 % of the capital
amount each year) and consequently also manage your income tax position.
9.
Most people experience a big increase in medical expenses once they retire. Thankfully, once
you have reached age 65, your medical expenses become fully tax deductible. An RA can be
used to build up a fund for post-retirement medical expenses in a tax-efficient way, as we have
already seen. On retirement, although the annuity is fully taxable, to the extent that it is used to
cover medical expenses it is deductible again. It is therefore, in essence, tax-free.
10. Retirement Annuities are currently not subject to Capital Gains Tax.
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Lower Your Marginal Tax Rate By Contributing To An RA
The Income Tax Act permits a taxpayer to deduct his/her current RA contribution for income tax
purposes up to a certain maximum amount. The maximum tax-deductible contribution for all taxpayers is
the greater of:
a) 15 % of the taxpayer’s non-retirement funding income;
Or
b) R3 500 less allowable pension fund contribution;
Or
c) R1 750.
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SUMMARY OF BENEFITS & FEATURES
 Flexibility of contributions
 Ad hoc lump sum injections
 Tax deductibility of contributions
 Tax rollover facility
 Closing the income gap
 Tax-favoured cash payments in addition to a pension payable on death or retirement
 A window of advantage in terms of underlying fund taxation
 Choice of underlying portfolios with switching capabilities
 Insolvency protection
 Estate duty advantages
 Providing for medical expenses after retirement
 Incoming benefits for emigrants
 Premium holidays
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