Explain: Retirement Annuity.

xrapidx

xrapidx

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Any one care to explain what a retirement annuity is in plain English?

Hows it work? Do I get a lump sum or monthly payments? etc.
 
A third of it yes.
But look at the tax implications of it.

Also, whatever u put in there, u can't touch until you're 55. Nor can your creditors.
Once you put in there, it's in.
Tax laws are likely to change a few times before you turn 55, so you want to think carefully...

Your financial advisor is probably going to tell you to invest everything in equities as you're still very young. That's probably the best option for u since you're in your 20's.

I'm trying to decide myself now, it's only 30k in my case.
I've got 18k in a RA at another place.

decisions... decisions...
 
Stupid question, what happens to the other 2/3s, does it get paid out monthly?
 
You have a few options, but basically it pays you a monthly pension, or you can take an annual lumpsum I think.
At retirement, accumulated capital in the retirement annuity taken as cash will be taxed based on a simplified sliding scale:

- The first R300 000 will be tax-free, thereafter,

- R300 001 - R600 000 will be taxed at 18%;
- R600 001 - R900 000 thereafter will be taxed at 27%;
- Lump sum amounts above R900 000 will be taxed at 36%..


-
At least two thirds of the capital must be invested in a pension-providing vehicle such as a living annuity or a guaranteed life annuity. No tax is payable on the transfer into the living annuity. The annual pension received after retirement is taxed at your marginal tax rate. Your marginal tax rate after retirement is typically lower than your marginal tax rate before retirement.
The capital in a retirement annuity cannot be withdrawn prior to retirement.
Click to expand...
Here's one option for the 2/3's
http://www.allangray.co.za/retirement_products/ag_living.aspx

(Just using allangray links as that's where I was looking this morning,
there's loads of mancos to choose from : http://www.fundsdata.co.za/Index/dom_manco_index.htm)
 
Do you have any sites with calculators for this sort of thing?

I want to work out how much I will have when my life is virtually over :p
 
Whats the ifference with taking a retirement annuity verses saving the money by yourself in an interest bearing account ? Currently I just save that money and I know how to handle my finances, why should I let someone else do it ?
 
xrapidx said:
I think there are tax benefits to RA.
Click to expand...

Apart from the tax benefits ? reading up I see you still end up paying tax on the amount depending how much you have.

In theory you give away your money so they can use it till its time to pay out ?
Isnt it better to use the extra money to pay off your bond/debt quicker ?
 
Yeh - thats something I've also wondered about - I think its more a commitment thing than anything else, a lot of people say they're going to put xxx amount extra towards their bond, or save xxx amount - but hardly ever do.
 
Bondizzo said:
Apart from the tax benefits ? reading up I see you still end up paying tax on the amount depending how much you have.

In theory you give away your money so they can use it till its time to pay out ?
Isnt it better to use the extra money to pay off your bond/debt quicker ?
Click to expand...

It depends on your tax (and bond situation). If you are a 40% tax payer, you effectively get 4 000 back a few months after the tax year for every R10 000 that you put into your RA - that's if you havent' used up your tax limit of only 7.5% of your pensionable salary by contributing to a company pension fund. If you are a contributing employee and you have used up your limit, you basically enjoy no further tax relief. BUT if you are self-employed or employed but not contributing to a pension fund, you should get the R4 000 for every R10 000 (just keep in mind legislation could change at any time). That's a 40% return on your money (for the first year/the tax year only).

On top of that, your investment is also exposed to the equity, property and bond markets (depending which type of underlying fund/portfolio you choose) and the potential growth that they could give you over the few decades to your retirment.

If you choose an aggressive portfolio (Allan Gray allows you at this stage to invest more than 75% in equity/shares), you could end up earning a return over the next 20 years very close to the interest you're paying on your bond. BUT there are no guarantees around the returns on your RA, only historical data (about a 100 years) and we don't know if the patterns will be repeated in future. On the other hand, if you choose to pay off your bond, you have a reasonably good idea what % of interest you'll be saving over the next year - much more certainty.

As Alf101 points out, an RA's biggest benefit is that it enforces the disclipline of staying invested until you're 55 and the certainty that you will have some income when you retire.

As you may pick up, there are many intricacies around the decision whether to save via an RA or rather pay off your bond first. Best to speak to an independent, non-commission driven financial adviser before you actually decide on an RA. Unfortunately, I'm not one and cannot help with the finer detail.
 
@Barefoot Billionaire - they want me to contribute a minimum of R5000 a month, how do I work out how much tax that'll save me?
 
xrapidx said:
@Barefoot Billionaire - they want me to contribute a minimum of R5000 a month, how do I work out how much tax that'll save me?
Click to expand...

OK, alarms going off. Why are the contributions compulsory? With Allan Gray, you can deposit the money into your RA in lump sums whenever suits you. Your minimum initial amount is something like R20 000 (check out their website for the latest minimums). And after that you deposit R5 000 whenever you can - doesn't have to be monthly.

The optimal amount to contribute is not always as easy as 7.5% of your salary (that is if you earn a salary and don't pay anything into a company pension fund). For commission earners and self-employed it works differently again.
 
Barefoot Billionaire said:
OK, alarms going off. Why are the contributions compulsory? With Allan Gray, you can deposit the money into your RA in lump sums whenever suits you. Your minimum initial amount is something like R20 000 (check out their website for the latest minimums). And after that you deposit R5 000 whenever you can - doesn't have to be monthly.

The optimal amount to contribute is not always as easy as 7.5% of your salary (that is if you earn a salary and don't pay anything into a company pension fund). For commission earners and self-employed it works differently again.
Click to expand...

Sorry - thats their recommendation - not compulsory- it is with Allan Gray though, but ABSA Private are giving me all the options, I'm just confused as to working out the tax benefit.
 
O, OK. Can't ABSA private bank help you with the tax calcs maybe? OR, if you're employed and your HR payroll manager is worth his or her salt, they'd be able to do the calc as well.

And one last thing, sometimes people think they're investing with Allan Gray just because the underlying portfolio is with Allan Gray. But at the front-end it could be another company (eg ABSA) with their own linked investment services provider (LISP) platform. If this is the case, just watch out for the admin fees. With Allan Gray's LISP feeding into an Allan Gray underlying portfolio, you effectively only pay for the investment management fees and the adviser fees. Effectively no admin fees after the discount for investing in one of their in-house funds/portfolios. But you'll see when the forms arrive whether they are Allan GRay branded or not.
 
Yeh - they are Allan Gray branded, there are a few others, the fees seem minimal - but I'll double check - thanks for the advice.
 
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