What is a Retirement Annuity?

A retirement annuity is a perfect solution if you want to save for retirement and don’t have a pension or provident fund. Like pension and provident funds, an RA account has great tax benefits that will help you increase your retirement savings. What is a retirement annuity and why should you use it?

A Retirement Annuity (RA) falls under the Pension Fund Act. This makes it a tax-deductible investment vehicle. An RA is perfect for individual investors who do not have a workplace retirement fund. Making this a great option if you are:

  • Self-employed
  • Don’t have a workplace retirement fund
  • If you want to compliment your pension or provident fund.
  • If you earn non-pensionable income (interest or rental income)

Pensionable income refers to the financial contribution your employer makes on your behalf towards your pension or provident fund.

Benefits of retirement annuity

One of the best benefits of investing in an RA is that you’ll be paying less tax. All the money that you put towards your retirement annuity is tax deductible. For example, if you earn R300 000 per year and you contribute R50 000 towards your RA, you’ll only pay tax on R250 000.

Paying less tax sounds great, especially when you start earning more money. That’s where your RA could come in handy. However, you’ll be limited to a 27.5% contribution of your annual taxable income and be limited to R350 000 contribution per annum. If you decide to contribute more towards your RA than the annual limits, your contributions will roll over to the following taxable year.

You won’t pay any tax on the returns you’ve made from your retirement annuity. Any returns including interest income, dividends, and capital gains are all tax deductible.  

Once you decided to retire you can withdraw up to a third of your RA as a lump sum. Or you could withdraw the full amount if your investment is less than R247 500.

You won’t be taxed on the first R500 000 that you withdraw and anything more than that will be taxed at incremental rates. For example:

  • The next R200 000 is taxed at 18%
  • The next R350 000 is taxed at 27%
  • Anything above that is taxed at 36% 

How does a retirement annuity work

*Please note that we are not affiliated with the providers mentioned in this article.

A retirement annuity functions similar to most investment vehicles. Imagine your RA as a bucket. And in this bucket you can include investment products, or blocks. These investment blocks can include unit trusts, equities, bonds, cash etc. Investing in these blocks allow you to earn more money over time while enjoying the tax benefits of the RA.

When you invest in an RA you’ll need to consider all the investment fees. You will be charged an annual fee for the RA and for all your individual investments within the RA. And if you decide to invest through a financial advisor, you’ll be paying for that as well.

If you had to invest with a financial advisor it may look like this:

Including a finical advisor into the mix will increase the amount you’ll have to pay on a monthly basis. So, the lower you can get these fees, the better.

The image below illustrates that for you.

The image above illustrates the impact of fees if you contributed R3 000 per month for 40 years and earned 6.5% per year.

Paying 3% annually for 40 years would generate R3,1 million, but if you only paid 1% annually you would have made R5 million.

Fees play an important role in your investments. You would want to keep your fees as low as possible.

The first thing you can do to minimize your fees is to get rid of your financial advisor. You can invest your money directly with a RA provider. You don’t actually need a financial advisor to open you RA account. Investing without a financial advisor will require a bit more work from your side. But in the end, it would be worth it.

The best retirement annuity?

As we’ve established before, you want your RA fees to be as low as possible. Deciding which retirement annuity is the best, will depend on the fees payable. Keep in mind that this is a very basic approach to establishing the bet retirement annuity.

If you’re a more advanced investor, you could look at how each RA divides its investments. For example, how are the RA’s split up between local and foreign equities, bonds, and property investments? This information may help you make your final investment decision.

However, since most of our readers aren’t advanced investors, we’ve decided to simplify the process by focusing on the fees of the RA’s.

Sygnia Skeleton

The Sygnia Skeleton range are a global balanced portfolios managed on a passive basis. Sygnia offer 3 different RA accounts ranging from low-risk, medium-risk, and high-risk investments.

Sygina Skeleton 40 – Low risk

Sygina Skeleton 60 – Medium-risk

Sygina Skeleton 70 – Medium- to high-risk

These are all global balanced index-tracking portfolios which are made up of local and foreign equities, fixed interests, money markets and other type of investments. The aim of the Skeleton RA’s is to provide investors access to well diversified portfolios at a reasonable cost.

Sygnia Skeleton fees

Sygnia charges a management fee on all their Skeleton portfolios, which are applied monthly.  

Sygina Skeleton 40 – 0.56%

Sygina Skeleton 60 – 0.55%

Sygina Skeleton 70 – 0.48%

When comparing the Sygnia RA accounts, the Sygnia Skeleton 70 might be a good RA to invest in as it has the lowest fees.

10X

10X aims to provide their investors more money for retirement at a low cost. They achieve this by offering three principles:

  1. Retirement investment risk
  2. Index funds
  3. Low fees

Retirement investment risk

10X invests each client’s money according to their retirement risk.  They’ll move your money from high-risk portfolios to low-risk portfolios. If you’re young and far away from retirement they’ll invest in a high-risk portfolio. As you progress closer to retirement your investment risk will decrease and 10X will move your money to a low-risk portfolio. That way you take more risk while you’re young and be more conservative when you’re older.

Index funds

10X, like other retirement annuity investment managers, invest in index funds. Investing in an index fund is generally a lot cheaper and safer than investing in active funds.

Fees

10X claim that they charge a 1% fee on their retirement annuity fund. However, they do not disclose this information on their investment Fact sheet. Although 10X do not disclose their Total Investment Charge (TIC) for their RA account. They do claim to “save most clients at least 1% pa in fees”.

Easy Equities

Easy Equities as an easy to use investment platform that allows you to invest in various assets. Easy Equities offers a range of RA funds to choose from. They make use of various fund managers that allow them to offer such a wide selection.

The Easy Equities Emperor Balanced RA is a good investment to start off with. This is a high-risk portfolio which is great if you’re just starting your retirement fund.

Fees

The Total Investment Charge (TIC) for this index is 0.90%. Which isn’t bad at all.

Which RA should you choose?

If you’re just starting out a great way to choose your RA is by choosing the investment with the lowest fees. In this case it would be the Sygnia Skeleton 70 with a TIC of 0.48%. By focusing only on the cost of your investment, you’re taking pressure off yourself to start investing. And that is more important than anything else. If you never start, you’ll never learn.

Once you’re more comfortable with investing you’ll be able to find your own investment style. And by that time you should have built up a reasonable amount of money that you could transfer to a new RA account.

So for now, keep it simple and stick to the RA with the lowest fees.

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