Mokgotla writes: I am 35 years old and I want to invest R700 a month in a retirement annuity. My company is also contributing to my pension fund. Is this a good idea and how do I invest?
Maya replies:
Since 1 March 2016 you are able to invest up to 27.5% of your income into retirement funds – that would include your company pension fund and a retirement annuity (RA).
Find out how much you are putting away into the company pension fund each month – both your contribution and your employer’s. Make sure you are maximising this amount as allowed by your employer as this is a cost-effective way to save for retirement.
As it is unlikely that your employer is providing the full 27.5% contribution, you could invest additional funds into an RA tax-free, however, there are a few things to consider:
Your marginal tax-rate: Research done by Glacier by Sanlam found that individuals with a lower tax rate would be better off by first maximising their annual R30 000 allowance into a tax-free savings account (TFSA) before contributing to a retirement annuity. Although an RA provides a tax deduction on your income, you will pay tax on the annuity generated in retirement. A person with a marginal tax rate of 41% may find that their tax rate in retirement is significantly lower and therefore gain by the overall tax saving. A person with an 18% marginal tax rate would receive less benefit. Although you receive no income tax break on a TFSA, you pay no investment tax and the proceeds are paid tax-free.
Flexibility: Under current legislation, both a pension fund and retirement annuity will pay out one-third of your retirement benefit at retirement, with two-thirds paid as a monthly income (unless your final retirement benefit is less than R247 500). A tax-free savings account does not have any restrictions on how much or when you are able to cash in. This could also be used to provide a lump sum in retirement or even an income.
This article first appeared in City Press.
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