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Opportunities and motivations for investing in a Retirement Annuity
1. Make additional provision for retirement, together with the potential for tax and estate duty savings
2. Clients who are older who still require tax relief or who simply wish to do better succession planning for their assets
– Section 11k will allow a tax deduction for any amount contributed to any pension fund, provident fund or retirement annuity fund to a limit of the lesser of-
• R350 000 or
• 27.5% of the person’s remuneration or taxable income.
– A maximum tax deduction of R350 000 in one tax year will be permitted and any unused deductions can be rolled over to another year.
– Most important benefit/ opportunity is to “top up” clients who are below the 27.5 % maximum. This can be done by increasing monthly contributions or making an additional lump sum ad-hoc to retirement funds.
INCOME TAX TOOL:
– A tax deduction (discussed below) for contributions to an RA, within certain limits.
– Unused deductions can be carried forward to future years or used to increase the tax-free amount at retirement.
– No tax (no income tax, capital gain tax or dividend withholding tax) is levied on the build-up of growth on capital within the RA (only taxed at retirement). (Consider the compounding effect on tax-free returns until retirement.)
– At retirement your marginal rate (paid on an annuity drawn) is likely to be lower than your marginal rate when you earned the income. (Additional rebates applicable on annuity income from retirement funding)
– The first R1 050 000 lump sum (restricted to one third) taken at retirement is effectively only taxed at 27% and no CGT is payable. Tax is limited to 36% if your lumpsum exceeds R1 050 000.
– Retirement annuities provide the member with access to a portfolio of shares or unit trusts managed by a stockbroker or fund manager as if it is a direct investment into a portfolio of shares or other instruments.
– Seen in this light, the RA contribution can be compared to a direct investment into a portfolio of shares on the JSE, at a discount of up to 45%.
– Profits made on share trades are also exempt from CGT.
ESTATE PLANNING TOOL:
– No estate duty (20%) on retirement lump sums or annuity payments on the death of the member.
– Large estates (above the current R3.5 million abatement, or R7 million between spouses) can capitalize on savings on estate duty.
– Heirs will pay tax on any income elected/received but the capital build-up will continue to be tax-free.
– No executor’s fees (3.5% excl VAT) on the value of the RA on death if you nominated a beneficiary.
RA VS TRUST:
– Investing in a single contribution retirement annuity and then electing a living annuity can be likened to being a beneficiary of a Trust.
– All deductible contributions made to an RA is removed from your estate immediately; both the lump sum (accruing after 1 January 2009) and the annuity are not subject to estate duty.
– Non-deductible contributions will create a “tax-credit” in the tax payers hands that can be off set against future income withdrawals from the retirement funds.
– Growth on assets held in the RA are also pegged against estate duty, similar to a Trust.
– Contributions to an RA, as opposed to donating the amount to a trust, will allow the money to be taken out of the estate without attracting donations tax, but with the added benefit of an income tax deduction.
– Individuals are allowed to donate up to R100 000 per tax year (R200 000 for couples) without incurring any liability for donations tax; where RA provides for more flexibility and up to R350,000 per tax year (from 2015) to be ‘donated’/ contributed and removed from estate.
– Donating assets to a trust will trigger anti-avoidance provisions in the Income Tax Act.
– Income that arises in the trust may be taxed in the hands of the person who donated assets to the trust.
– Investments within a trust don’t qualify for interest exemptions. Investment growth in an RA is tax-free – it attracts no income tax or capital gains tax (CGT). (Had the build-up taken place in the investor’s estate, the payout could potentially be reduced by up to 20%, being the current estate duty rate.)
– A trust that is not managed correctly runs the risk of being attached as a “sham” trust and therefore the assets inside the trust are exposed.
– Investors are protected in the case of insolvency;
BUYING A LIVING ANNUITY:
– Protected against creditors in the case of insolvency or divorce. (With divorce, it’s important to note that this does not apply during the build-up phase.)
– Beneficiaries can be nominated to receive an income or a cash lump sum on the death of the investor. (Annuity income taxed in the hands of the recipient beneficiary at his/her marginal tax rate. Lump sum taxed at the deceased’s retirement/death lump sum tax tables – maximum tax applicable is 36%)
– On death, the annuity income can be spread across a number of nominated beneficiaries which may reduce the overall tax burden.
– No executors fee (3,5% excluding VAT) provided that a beneficiary is nominated.
– The investor can select the underlying assets in which the annuity is to be invested.
– No income tax, capital gain tax or dividend withholding tax is payable on the growth on assets in the Living Annuity.
– No Estate Duty on the amount applied to buy the annuity.
– Unused deductions on original RA can be carried forward to future years or used to increase the tax-free amount at, and due to recent amendments, after retirement.
OTHER BENEFITS AND PROTECTION:
– Protected against creditors and insolvency in terms of the Pension Funds Act.
– The annuity you receive after retirement from your RA is only taxed when you receive it (if you defer this you pay no tax until you actually receive it).
– Choice of investment portfolios.
– Full cash withdrawal can be made if the investor can prove he/she is a non-tax resident for an uninterrupted period of three years from 1 March 2021