Retirement Insights | 3 min read

Why a retirement annuity is a good idea

By Roenica Tyson, Investment Product Manager

For many years retirement annuities (RAs) have formed part of investors’ retirement savings plans.  They’re often the first investment products that newly-employed, young professionals sign up for on their retirement income planning journey, and with good reason.

Roenica reminds us why these products have increased in popularity and why you should probably consider having one in your investment portfolio.

It’s your decision – and it’s a good one

An RA offers flexibility in terms of who you can invest with and the investment choices you can make with the help of your financial adviser. That means you can decide if and when you want to invest in an RA, how much to invest and the underlying unit trust choices you would prefer.

We’re just not saving enough for retirement

If you’ve decided to invest in an RA, nicely done. The reality is that most people who enjoy a retirement benefit at work, opt to make the minimum contributions that the retirement fund allows for, and it may not be sufficient. So, topping up with an RA is advisable. People who invest in an RA as well as their employer retirement fund, create a larger pot of retirement savings, which means they have more to invest to secure a better income during their retirement.

So, here are seven reasons why investing in an RA makes good investment sense

  1. It provides a kickstart to your retirement savings plan.  Whether you are a full-time employee, on a fixed-term contract, or self-employed, an RA can propel you on your retirement savings journey – as a standalone solution, or as part of a retirement savings plan.
  2. Enjoy a bunch of tax benefits. A portion of your contributions is tax deductible (currently up to 27.5% of the higher of taxable income or remuneration, up to a limit of R350 000 per year). You also don’t pay tax on any interest or dividends and no capital gains tax is applicable.
  3. It ticks many of the right retirement savings boxes*. An RA potentially offers you the opportunity for investment in a wide range of funds, risk-profiled solutions and s, customised to suit your needs and risk profile.
  4. It’s affordable. A small monthly investment can make a big difference in your retirement savings outcome years from now.
  5. Your savings are protected from your creditors. If you are in the process of insolvency, your retirement annuity investment is protected from creditors – they won’t be able to take from your savings. This ensures that your savings will be available when it is most needed and for what it is intended – saving for retirement.
  6. You can’t touch the investment until you are at least 55 years old. Once you invest in an RA, it’s for the long haul. An RA encourages disciplined savings for your retirement, which is why tax is weighty on early withdrawal. Committing to an RA until you reach retirement age is sensible. The 60-year old you will be grateful that you did.
  7. The underlying investment options of your RA are selected based on your particular risk profile. Every investor is different with different needs, lifestyles and risk appetites that change over time. This is why consulting a financial adviser is critical.  Appoint one to help you establish your risk profile, based on your life stage and financial needs. The table** below is an example of the retirement savings outcomes for three investors who each invested R500 per month in an RA.
  Thabo Cathy John
Age when investment in the RA commenced 25 35 45
Years until retirement 35 25 15
Retirement age (in years) 60 60 60
Risk profile Moderate aggressive Moderate Cautious
Return assumption 10% 9% 8%
Investment amount into an RA R500 per month R500 per month R500 per month
Value at retirement age R 1 898 319.03 R 560 560.97 R 173 019.11
*We strongly recommend talking to your financial adviser before making any investment decisions or buying investment products. All investments should form part of a holistic, needs- and profile-based investment portfolio.
**This is an example and has been created for illustrative purposes only.
Glacier Financial Solutions (Pty) Ltd and Sanlam Life Insurance Ltd are licensed financial services providers

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