A tax-efficient way to save for retirement
Retirement annuities have a number of advantages – if properly structured. The biggest advantage is their tax-efficiency i.e. contributions are tax deductible (subject to certain limits). This means that you could receive money back from SARS at the end of the tax year.
You can contribute the greater of: 15% of your ‘non-retirement funding’ income, R1 750, or R3 500 less your allowable pension fund contribution, to an RA tax free. Income earned on your investment over the time up to when you retire is also tax free. If you are self-employed, or your employer does not offer a pension or provident fund, your income is considered ‘non-retirement funding’. If you are a member of your employer’s pension or provident fund, your income is known as ‘retirement funding income’.
Any additional contributions (over the 15% limit) may be carried forward to the next tax year.
At retirement, a maximum of one-third of your benefit can be taken as a cash lump sum, therefore a minimum of two-thirds of the capital in your RA must be invested in a pension-providing vehicle such as a living annuity or guaranteed life annuity. This ‘transfer’ is tax free.
Your annuity income is taxed at your marginal rate, which may be lower than your tax rate prior to retirement.
Alternatively, you can take the full benefit if the pre-tax value of your benefit (across all your Allan Gray RA investment accounts) on the date of retirement is equal to, or not more than R75 000, or any other amount determined by legislation or regulatory authorities.
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