🔒 RA tips for beginners: How a Retirement Annuity boosts your savings

EDINBURGH — Want to pay less tax and boost your savings pot at the same time? There’s a financial product called a Retirement Annuity (RA) that will help you do this – provided you choose your RA with care. “Any money you invest in an RA is tax deductible. This means you can deduct the amount you have invested from your annual income and reduce your taxable income. You therefore pay less income tax or get a refund from SARS when you complete your tax return.” – Jackie Cameron

RA tips for beginners: How an RA works

An RA is an investment shell that has special tax arrangements attached to it. You can only put certain kinds of investments into it.

RAs lock your money in until you are at least 55, though it is possible to cash in an RA in some circumstances (for example emigration or if you are permanently disabled).  No-one else can touch this money, either: so if you owe money your creditors can’t access your RA savings.

How you invest

You can invest monthly in relatively small amounts, of say R1,000, by signing a debit order that takes regular instalments from your bank account. The main advantage of monthly debit order investments is that you are forced to save each month. But, a big disadvantage is that you can’t just stop your savings plan.

Or, you can plough a lump sum into an RA just before the end of the financial year. Many self-employed people opt for lump sum investments when they know how much money they have made and therefore how much they can invest in a tax-efficient way. This is why you will see many financial services companies promoting their RA investments as the financial year draws to a close.

If you want control over how much you invest in an RA, not just this year but in future years, and don’t want to commit to a fixed savings plan, opt for annual lump sum investments.

There are usually minimum investment stipulations, which vary between RA providers. Work on having at least R50,000 to invest in your RA.

RA tax breaks

The government offers the RA-related tax breaks to encourage you to make an effort to save for your long-term income needs. They are not entirely tax-free, because you do pay tax later when you start drawing your savings.

The idea is that the tax break gives you just that little bit extra cash to nurture over the years. Theoretically, it should mean you make more than you would without the tax break – however, I must emphasise that this perk can disappear if you pick the wrong RA.

This is because the costs that financial intermediaries and various service providers can take for helping you with your investments can significantly erode your returns.

Read also: Reduce your tax bill with a Retirement Annuity and save for the future

I speak from experience: I have invested money in several RAs over the years. My RAs via life assurance companies have not delivered the expected returns, largely because of the costs they – and intermediaries – have deducted for investing on my behalf.

My Allan Gray RAs, on the other hand, look fantastic. I feel good every time I look at my statements from the private investment company.

Now, this is not because Allan Gray has worked miracles with the underlying investments – in fact, Allan Gray has had some disappointing years compared to other asset managers over this time.

The rosy returns I see in my Allan Gray RA statements are largely because the costs of investing have been kept to an absolute minimum. I saved by avoiding an intermediary, opting to invest directly through Allan Gray.

More companies are competing on low fees than when I took out my first RA investment through Allan Gray. These companies include 10X Investments and Sygnia.

RAs: The numbers – tips from Allan Gray

You save tax and your money is safeguarded for your retirement, says Allan Gray of the benefits of the RA.

“The government allows you to get a tax deduction on the money you invest up to an annual amount of 27.5% of the greater of taxable income or remuneration (capped at R350,000 annually). If you invest more than this, you can still get the tax benefit in the future,” it says.

When you take your money out of your RA at retirement, or any time after you reach 55 years, you must transfer at least two-thirds to an investment that will provide you with an income in your retirement, it notes.

“This transfer is tax free, and any money you take in cash is taxed according to the retirement fund tax tables, which also allow you to get up to R500,000 tax free over your lifetime. However, your income in retirement will be taxed according to your marginal income tax rate at the time,” says the investment house.