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Weighing in on tax-free savings accounts and retirement annuities

Q. I am 58 years old and have seven years before retirement. Is it too late to buy a retirement annuity?

Tax-free savings account

You can invest R33 000 per year in a tax-free savings account and still get the tax-free benefits of this type of investment. However, you don’t have to invest every year. You can invest R33 000 once off and leave it to grow.

You could also invest monthly if you wish. The amount you can invest monthly would be determined by the company that you invest with as they would have a minimum amount, normally R500 to R1 000, but you are able to invest up to R2 750 monthly tax-free.

It is not only banks that provide tax-free savings accounts. Asset management firms such as Investec, Allan Gray and Coronation, for example, also offer tax-free savings accounts where your money would be invested in unit trust funds of your choice.

Banks and asset managers would have different charges and it would also depend on whether you are just invested in cash or whether you choose to invest in unit trust funds – which could also include bonds or equities that should, over the long-term, have a higher return than by just investing in cash.

Retirement annuity

It is not too late to buy a retirement annuity. You do not have to “retire” from a retirement annuity investment when you retire from your employment. You can retire from a retirement annuity investment at any age.

However, you will only benefit from the tax deductions in relation to your contributions to a retirement annuity if you earn an income.

In simple terms, you can get a tax deduction from your income in respect of your contributions to a retirement annuity of the lesser of R350 000 or 27.5% of (the higher of) your remuneration or taxable income per year. Remuneration and taxable income have different definitions in the Income Tax Act.

The growth (interest, dividends) in the retirement annuity is not subject to tax. You can stop contributing to the retirement annuity at any time and leave it to grow.

When you retire from this investment you would be able to take one-third in cash, but you would be required to purchase a life annuity or a living annuity or a combination of the two with the other two thirds of the investment.

You can also purchase an annuity with the full amount – that is you do not have to take any cash.

Should you pass away while invested in a living annuity, this investment will not form part of your estate for estate duty purposes. You can nominate a beneficiary or beneficiaries on the investment who will receive the proceeds on your death.

The difference between a living annuity and a life annuity is that with a living annuity you may be able to leave a legacy for your loved ones, but you would be responsible for choosing your own investment funds and deciding on how much to draw every month.

You take the risk of ensuring that you do not run out of money. A guaranteed annuity or a life annuity would provide you with an income for the rest of your life. The insurer takes the risk.

Annuity at retirement

If you have not saved enough to provide sufficient income in retirement (which is unfortunately the case for most South Africans) and you wish to maximise the income, you could obtain a guaranteed life annuity and be underwritten at retirement.

Should you suffer from certain medical conditions or in the event that certain lifestyle factors, like smoking, apply to you, a company that specialises in underwritten annuities may be able to offer you a higher income at retirement as they will take into account that you may not live as long as a “standard” life.

Investment products can be complex and it is difficult to navigate your way around them. It is, therefore, recommended that you speak to a financial adviser to help you make the right decisions.

Source: Fin24 via News24Wire

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