There has been much fuss in the press about the disadvantages of retirement annuities (RA’s). Most of the concerns relate to the high costs and inflexibility of RA’s. RA’s can be invested in one of two different cost structures, one being a Life Assurance cost structure and the other a Unit Trust cost structure, the latter option is generally cheaper and more flexible.
With a Unit Trust costed RA you can start and stop premiums without incurring any penalties.
The growth within an RA is exempt from income tax and thus you would achieve a higher rate of return in an RA than if one were invested in another investment structure (e.g. unit trust or endowment) assuming that the investment portfolio for each investment structure is the same. Over the long term, this additional return can increase your income in retirement.
Within limits, your contributions to an RA are tax deductible. If your marginal rate of tax is 40% and you are contributing R1 000 per month into the RA, you would get 40% of your contributions back at the end of the tax year.
You might argue that the income which you receive from the RA at retirement is taxed but what is important to note is that one would generally retire on about 75% (or less) of one’s pre-retirement income thus putting you into a lower tax bracket.
RA’s are not included in your estate for estate duty purposes and thus having funds in a RA can be a very effective estate planning tool.
In a country with a savings rate of less that 1%, an RA is an effective way of saving for your golden years at a reasonable cost.
If you are not happy with the investment house looking after your RA investment, you can move it to another investment house.
Good things come to those who save, so get good advice from a Certified Financial Planner (CFP®) and start saving now.