A retirement annuity (RA) is a pre-retirement savings product that may supplement or act as a substitute for membership of an occupational pension or provident fund. It is like a “personal” retirement fund that is not tied to a job or company but that enjoys the same tax concessions as an occupational fund. It is not to be confused with post-retirement income products – life and living annuities.
Types of RAs
There are essentially two types of RAs:
1. Contractual RAs offered by life insurance companies. This is the traditional, “legacy” RA in which you are contracted to contribute a fixed amount (with the option of an annual escalation) over a fixed term, usually until your expected retirement age of 55, 60 or 65 years. You have a choice of underlying funds including “smoothed” investments, whereby the life assurer reduces returns when the markets are doing well in order to boost returns when the markets are underperforming.
These products typically penalise you if, for some reason, you are not able to maintain your monthly contributions, want to withdraw funds early or want to transfer to another provider. In the past, penalties on legacy products were often severe; however, regulations introduced in the mid-2000s restricted penalties to 30% on products sold before 2009 and to 15% on products sold after 2009.
2. Flexible RAs offered by unit trust companies. These RAs have risen in popularity because they have no contractual conditions and are, in many ways, like discretionary unit trust investments, with a choice of underlying funds on the provider’s investment platform. You can increase, decrease, or stop your contributions at will. Withdrawals, as on all RAs, are subject to certain conditions (see below).
Rules on investments and withdrawals
Along with occupational pension and provident funds and preservation funds, RAs are governed by the Pension Funds Act. This stipulates, among other things, that:
• Underlying investments are subject to Regulation 28 under the Act. This imposes prudential limits on exposure to higher-risk assets. For example, the total exposure to equities in an RA portfolio may not exceed 75% and to any single company not more than 25%. Total offshore assets are limited to 45%.
• You may not access your savings before the age of 55. Exceptions are access to your “savings pot” under the two-pot system introduced in 2024; if you retire owing to ill health; or if you emigrate, in which case you need to wait three years.
• Under the new two-pot system, when you retire at or after 55, you can take up to the full amount in your “savings pot” and up to a third of the “vested pot” (if applicable) as a cash lump sum, subject to tax (see below). The other two-thirds of the vested pot and the full amount in your “retirement pot” must be used to buy a pension (or “annuitised”). If the total amount to be annuitised across all your retirement-fund investments is less than R165 000, you can take the full amount as a cash lump sum.
Tax benefits
• On all your retirement-fund investments, including RAs, your contributions of up to 27.5% of your annual taxable income or remuneration are fully tax-deductible, with a ceiling of R350 000 per year. Excess contributions may be carried over to the following tax year or set off against income tax in retirement.
• There are no taxes within the investment – no tax in interest, capital gains or dividends.
• At retirement, the first R550 000 of your lump sum is tax-free. See the SARS tax table here.
Transfers
You are allowed to transfer your RA to an RA with a different provider or into a retail preservation fund, although you may incur penalties on a contractual product and administration fees. Your adviser may not charge an initial advice fee on transfer, but may subsequently charge an annual fee on the assets transferred, depending on your negotiated fee agreement.
Transfers are subject to Section 14 of the Pension Funds Act, which requires certain valuations and approvals by the regulators, which invariably make it a lengthy process.
SOURCES:
https://www.oldmutual.co.za/articles/pension-provident-funds-ras
