Do you have plans in place for when you decide to hang up your scrubs for the last time? What about your staff – are they prepared for retirement?
What is a retirement annuity?
A Retirement Annuity (RA) is a type of investment agreement you, as an individual, have with an insurance company where you pay a lump sum or a series of payments into the investment where it will gain interest and accumulate over a significant number of years. The goal of this to still have a steady income once you decide you are ready to retire from the medical world and stop working. Be careful not to confuse this with retirement fun contributions you receive from your workplace employer.
Who should invest in retirement annuities?
- The self-employed or those that own their own practice
- Someone that doesn’t have access to a workplace pension or provident fund through their employer or practice owner
- Someone who wants to supplement their pension or provident fund savings
- Someone who earns significant amounts of non-pensionable income(e.g. interest and rental income)
How does a RA work?
When you decide to retire, two-thirds of your retirement annuity must be used to purchase a compulsory annuity which needs to be:
- An underwritten annuity – which takes into account a person’s lifestyle and medical history to determine their life expectancy
- An investment-linked living annuity which is usually drawn in monthly payments like a pension
- A combination of the two
Compulsory annuitization (the time between the accumulation and pay-out phases of an annuity) applies to any fund balances above R247 500. If you have invested in multiple RA’S in one RA fund, the annuitization requirement considers the collective value of your RAs. Alternatively, if you have multiple RAs in different RA funds, the annuitisation requirement is applied to each RA individually.
There is no maximum age at which you need to stop contributing to a RA, but you are only able to retire from your RA from age 55 onwards – unless you are forced into early retirement due to ill-health, which is the only exception.
RA’s and Tax
- Your contributions to your RA are tax deductible are set at 15% to 27.5% of your taxable income – depending on which is higher but not over R350 000. The 27.5% limit applies to the combined contributions to all funds (pension, provident and RA’s). You can join as many RAs as you like, but you must be aware that the tax relief is determined in the cumulative amount, not by each individual fund.
- Once you have reached age 65, your tax deduction on medical expenses increases. An RA can be used to build up a fund for post-retirement medical expenses in a tax-efficient way. On retirement, although the annuity is fully taxable to the extent that it is used to cover medical expenses, it is partially deductible again.
- Proceeds from RA’s are exempt from estate duties – tax to be paid to SARS upon your death.
- Even if you cannot use the tax deduction now, you do not have to lose that tax benefit. They can be carried forward to the following year(s). This will either lower your tax on lump sums at retirement or lower the tax on when you receive annuity income on your annuity
Withdrawing RA funds before age 55
There are exceptional circumstances where you can withdraw funds from your RA before age 55. These are:
- If you are emigrating and have gone through a formal financial emigration process with SARB and SARS
- If your RA is paid-up (you are no longer required to make monthly contributions but are still invested) and your RA value is less than R7,000
It is always better to avoid withdrawals before retiring as these withdrawals are subject to lump sum tax. (See table below)
Fig 1: Retirement and withdrawal lump sum tax tables.
|All Retirement||Tax Rate||Withdrawal||Tax Rate|
|R0 – R 500,000||0%||R0 – R25,500||0%|
|R500 000 – R700 000||18%||R25 001 – R660 000||18%|
|R700 001 – R1 050 00||27%||R660 000 – R990 000||27%|
|+R1 050 000||36%||+R990 000||36%|
Can you transfer your RA?
You can transfer your RA tax free from one RA provider to another, but you cannot transfer your RA to another type of retirement fund. The cost or penalty for transferring or making your RA paid-up depends on your agreement with your current annuity provider.
What happens to your RA’s if you pass away?
Upon your death, your benefit will be allocated by the fund. The trustees must ensure that all your financial dependents are considered. You can assist them by listing all such dependents in your beneficiary nomination form. If you do not leave any financial dependents, the trustees will allocate the benefit according to your beneficiary nomination form. If you do not have any financial dependents and you fail to complete this form, the money will fall into your estate and will be distributed according to your will. Any lump sum payment on your death will be taxed as a retirement benefit as though it had been received by you prior to your passing.
Naturally, the earlier you start investing in a retirement plan, the better – it gives your investment more time to grow and accumulate. You will be very thankful that you did once you are retired comfortably. RA’s are not a one-size-fits-all situation, a lot depends on your lifestyle and income. Before committing to an investment, make sure you fully understand what you are committing to and what the requirements are.