Financial planners love to recommend Retirement Annuities (RAs) as the Holy Grail for a secure and comfortable retirement.
And while they are quite correct regarding the positive aspects of RAs, I have found that they tend to embroider these positive traits and just lightly mention the possible negative aspects of RAs.
In this piece I am going to just do the opposite. We’ll have a quick look at the positive qualities of RAs, the role of the Receiver, but then spend a bit more time on those qualities that might come and bite you in the you know what . . .
(Illustrations in this article has personally been experienced by the writer.)
When one is sequestrated, your RA is reasonable secure against creditors, to a certain extent even the mighty SARS. The law in this instance is quite complicated though and should be checked with your financial advisor.
And just a caveat here, do not think it won’t happen to you – it happens to the best of us.
Another big advantage is that annuities allow you to defer paying taxes, but as we’ll see later the keyword here is defer.
Your RA benefit is not subject to estate duty.
Under the Income Tax Act, severance benefits (pension or provident fund and other benefits) are treated like lump sums paid to you on retirement - you get the first R500000 tax-free and the balance is taxed at rates of 18%, 27% and 36% depending on the amount.
That sounds like a who-ha – very nice of Mr Tax Man – but remember he always works wih a plan.
You get your money and use it wisely: take an amount of what is left after deductions to live on, pay off some debt, invest a large amount, and after a year or two you realise you will have to go and work again. You are fortunate enough to find a position and work merrily (not to the tune of I owe, I owe, its off to work I go).
AND THEN . . .
At the age of 55 ( the minimum age) you decide to monetise your RA, which stands at R300 000. You decide to take your allowed amount of R100 000 in cash (one third) and let the RA pay you the remaining R200 000 over a certain period (your choice, 10 years, 11 years 15 years . . .)
Not bad seeing that your salary is enough to live on. But, the R100 000 lump sum that you decide on, shrinks to a shocking amount of R63 000 after tax. Remember, you had your once off tax break of R500 000 when you were retrenched, and now SARS has no mercy. It sees the R100 000 that you decided to take as an additional income, and you are severely taxed on it.
You have also decided to let the RA pay you R1500 per month over 11 years (your R200 000 that you are not to allowed to take). And boom, that is taxed as well, because it is seen as an additional income.
No interest, nada, none:
The insurance company or whomever you decided to invest with, does not pay you interest on the remaining R200 000! Where the interest goes to, nobody will tell me officially.
I am sure though, the insurance company invests your money and receives interest on it, but that is a story for another day. O, also remember the effect of inflation; after 11 years years your pitiful amount of R1500 per month is even more pitiful.
Another thing to remember; make sure to nominate the remainder of your money to a beneficiary in case of your death before the moeny runs out. A good friend of mine pointed out to me that your policy changes when you decide to monetise your money. You then have to make sure that you have nominated a beneficiary.
I thought that the beneficiary nominated on the RA stays the same, when you let the RA start paying out.
My friend was correct. When I phoned I was told that the new policy doesn’t provide for a beneficiary.
Being a bit of a bulldog I insisted on speaking to a senior consultant. He then speedily put things in order. The company’s written excuse was that it was an employee in traing. Mmmm.
And then . . . after six years you get retrenched again.
Your former employer pays you the compulsary minimum of six weeks pay, plus accumulated leave, and his contribution to your medical fund, and other benefits if any (this time no pension fund).
And the Receiver hits you with another 36% deduction!
The moral of the story?
If a financial advisor tells you that you will be able to retire comfortable on your RA without mentioning the caveats, fire him/her even before appointing them.
As with investment in shares, I believe the most efficient way to save for retirement is in speaking to an accredited financial advisor and diversify. It won’t hurt to speak to a registered share broker if you can afford a longer view either.
And get yourself training in something being an electrician, welder, plumber, or develop your hobby into something you can make a business of, when that second or third retrenchment happens.
There is also the UIF, but that is another story as well.
Author: Maarten Roos
Disclaimer: Maarten Roos is a freelance financial sub-editor, has written or edited news in the news media and has been meddling in shares for himself for more than 30 years. He may not give financial advice, but has been bitten before, and may share this with you.