Retirement Annuity

[akescpt]

Feel free to fire questions at me if you so desire. Yes, I am also offering advice on a public forum but I'm fairly convinced I know what I am talking about. And I'd be getting nothing out of it so no need to lie

whats your thoughts on retail saving bonds? someplaces gaurantee 9%. its not shooting the lights out but no costs and your money is safe.

 

[Jola]

I am by no means a Financial Adviser.

You say that as if it means something ? It is by no means onerous to become one, and it does not imply that a FA is a guru.

Maybe your advice can be useful, don't underestimate yourself.

 

[Dimpled_Dude]

"Experts" out in force I see.

Please point me in the direction of any investment that can earn you a guaranteed 40% (assuming you are at highest tax rate). And that is before considering the return on your portfolio (which is taxed more favourably than other investments too).

Some are saying avoid an RA and get a unit trust. You do know you get unit trust RAs and life company RAs? The latter is getting the bad press but even then they have improved. Penalties only in first 5 years and improved costings. However, if still not convinced go the unit trust RA route.

It is frankly stupid to not take advantage of the tax break. Yes, one can argue the tax is merely delayed but when you are older your tax rate improves, and your earnings probably drop, and you have been earning returns on the full amount for all those years.

yeah, dont forget that you also get a tax break on the dividends paid into the RA and no capital gains tax.... and this over and above the tax rebate on your contributions. This alone makes the unit trust RAs a more attractive option....

 

[ClintZA]

whats your thoughts on retail saving bonds? someplaces gaurantee 9%. its not shooting the lights out but no costs and your money is safe.

They have a place for certain investors. To say they are worth anyone's while without knowing their needs and intentions is silly. That is always the problem with anyone online advice. Very rarely do two people have exactly the same circumstances so their needs would differ.

Not sure which retail bonds are guaranteeing 9% but RSA retail bonds will offer as much as 7% but only if you go for the five years option. And if you were investing for that period I'd diversify a bit and expose you to other assets classes.

And those returns are not exceptional... money market will give you around 6%.

You say that as if it means something ? It is by no means onerous to become one, and it does not imply that a FA is a guru.

Maybe your advice can be useful, don't underestimate yourself.

It should mean something. As stated earlier an FA is held accountable for bad advice given, someone on a public forum is not. They also have compliance to meet, acts to abide by, personal indemnity cover for i) advice etc etc.

And the procedure is more onerous than a few years back. Then you just needed a matric, now there are annual exams to pass and "fit and proper" requirements to be met.

 

[Jola]

It should mean something.

Not to me, the last person I would listen to.

But I accept that they do have a place.

 

[ClintZA]

Not to me, the last person I would listen to.

But I accept that they do have a place.

And you're entitled to that. I don't feel the need for the use of a computer technician or a web designer either (the internet provides all my answers) but I'm sure some out there do.

Based on what is being advised on this thread there are a LOT of people who could do with the services of someone qualified to advise.

 

[^^vampire^^]

Person A & Person B Gets R10 000 per month.

Person A has an RA:
R10 000 - R1 500 = Taxable salary of R8500

Person B has no RA
R10 000 - R0 = Taxable salary of R10 000

Person A pays R18 360 yearly for tax
Person B pays R21 600 yearly for tax

Already if you have an RA you are saving R3240.00 per year.

 

[ClintZA]

Kryptonite, let me admit, your calculations confused the hell out of me so I used the same values but did it my way. Me may well find it ends up giving the same answer, in fact it should if we both worked it right.

What I have done is adjusted the taxable income on a monthly basis so you are taxed correctly. You are allowed to do this, as per SARS, and you merely need to inform your payroll department of your contributions to the RA and get them to reflect this on your pay slip.


PERSON A vs PERSON B SCENARIO

Person A : Earns R50,000 - R7,500 RA contribution = R42,500 taxable earnings

Based on the SARS tax tables they are liable for tax of R10,574 on this R42,500 leaving them with a take home income (ignoring all else) of R31,926.

Person B : Earns R50,000 - R0 RA contribution = R50,000 taxable earnings

Based on the SARS tax tables they are liable for tax of R13,423 on this R50,000 leaving them with a take home income (ignoring all else) of R36,577.

So person B has R4,651 extra disposable income per month BUT the important thing to not forget is that person A has a R7500 investment in place! So effectively person A is R2,849 better off.

Peeking at yours quick I see our numbers agree thus far but you seem to sneeze at an additional 61% put towards investment. Yes, you spun the numbers so that person A was only 5.7% better off but if we calculate the amount going to investment he is 61% better off (R7,500 vs R4,651) from an investment perspective.


EFFECT OF COMPOUND INTEREST ON ADDITIONAL SAVINGS

Imagine that additional R2,849 going towards investment (at no extra expense to you) compounded annually over a period of, let's say, 20 years. Let's assume a 10% return on average over those 20 years, that is equal to an additional R2,062,638 in future value or R306,598 in present value.

CGT AND TAX AT TIME OF RETIREMENT

You mention CGT on your 1/3rd lump sum which is inaccurate. There is currently no CGT or dividend tax liability on retirement savings. This is shown to result in a boost of 8% to your savings after 40 years of saving (source)

Your 1/3rd lump sum is also taxed favourably. The first cumulative R300,000 is tax free, the next R300,000 at 18%, the next R300,000 at 27%, and anything thereafter at 36%. So once again you benefit.

You have now taken a 1/3rd of your investment value and, you are right, the remainder will pay out to you as a monthly pension from an annuity and be taxed. BUT you are likely to already take a knock in your earnings (as I know of very few, if any, people who have saved sufficiently for retirement), you have reduced the amount you are drawing an income from by 1/3rd and once you reach age 65% you enjoy more favourable tax rates. So yes, although the tax liability is merely delayed you enjoy immense benefits by doing so!


FAVOURABLE TAX ON RETURNS WITHIN THE FUND

Ad if that were not enough benefits, we have also ignored the favourable tax on your returns within a retirement fund. This is perhaps best illustrated with a random fund fact sheet. This is a moderate fund with exposure to all four asset classes. Taking a look at the 1 year returns you can see that as a result of the favourable tax within an RA fund you earned 11.49% versus someone in a taxed fund (an endowment for example) who only earned 9.69%. Exactly the same fund, only difference being the benefits afforded to retirement funding.

Bottom line is that retirement annuities are not some major scam that was created to pull the wool over the eyes of the public in general. They have distinct benefits which are put in place to attempt to encourage people to save for retirement. The fact that people are so sceptical speaks volumes for the lack of a savings culture in SA.

 

[ClintZA]

It would be remiss of me to not challenge your other points raised so let me do so.

RISK

We seem to be referring to something different to the normal definition of risk from an investment perspective. The term of an RA would imply that the risk is in fact reduced due to the length of the investment horizon. But if we refer to risk as you raise it then you are missing a point which makes an RA as a means of saving for retirement a far less risky one - accessibility! You put this forward as a negative but I am yet to meet someone who has not dug into their "liquid" savings when they had that important holiday to go on, or that school tour for the kids, or that deposit on that shiny new car they needed. Yeah, they all promise that they will pay it back and catch up but they are fooling no one. A tangible benefit of this for a business owner is that the lack of accessibility means that the funds cannot be attached when their business folds or they get into personal trouble financially.

You are right, who knows what the future holds, but then perhaps we should be advising that people should not buy houses either. The government could change the law on property ownership at any time and then what.... yeah, I am being a little silly but if things go south you'll have more to worry about than just your RA savings.

PERFORMANCE

As mentioned earlier you can get access to virtually all the same funds on an RA platform as you can on a unit trust platform. And if you go the as and when commission/costs route then you'll find the costing are the same too. People keep perpetuating things they have heard in the past. Things have changed.


You also claim when things are not rosy there is nothing you can do. Oh yes, there is. You can switch portfolios. Hell, you can even do a Section 14 switch between companies if you are that upset with where you are. And if you were paying as and when commission and costs you'd not get penalised at all. In fact, even with upfront commission and costs on an RA you would only be penalised for changes in the first five years with most companies.

 

[ClintZA]

Read both the article and comments, some classics here!!

I read the article but not the comments. The article seems to directly oppose what you are saying. Am I missing something?

Point out specifics and we can happily debate them

 

[Freshy-ZN]

My God theres some bad advice and some bad understandings of RAs here, again!

Whoever said your benefits to contributing is limited to 15%- sit down and stop talking k@k. Any contributions over 15% are carried forward, and forward and forward increasing your TAX FREE lump sum allowance at retirement. So you benefit now and later.

And who said RAs are expensive and/or less cost effective than units trusts? I know of one provider who gives you an extra 2% allocation on contributions of R1000 a month or more with dirt cheap costs and no penalties. Also you are not taxed on growth in an RA portfolio but you are in UTs. Do UTs give you tax breaks? You Sir may sit down as well.

Im not going to pick apart all the bad advice as Ive done it in numerous threads about RAs before.

 

[BigAl-sa]

Then you missed the point, human nature is to seek what we want and to hear and what we want to hear. At the moment we are debating the validity of RA's, you feel it is a good investment, and I feel there is something I can do better with my money.

Just remember, sometime in the not too distant future, you are going to retire. You *will* be looking for that money you couldn't get your hands on to make up a decent monthly salary.

With investments other than RAs, it's just too easy to get your hands on the money when you get that 'gatjuk' to buy that new car you can't really afford.

When you're young, you're invincible. When you get to my age, you're sorry.

 

[ClintZA]

...

I too would like to thank you for the interaction. It is only through conversations like this that others can perhaps learn. Unfortunately they need to decide which version is correct

You cannot say "Imagine"! You MUST invest that money otherwise you missed the whole exercise of the RA.

Misunderstanding between us again. The imagine was not directed at the investing of the money, that is a given as we stated person A contributed R7500, but rather the latter part of the sentence ie "imagine the effect of compounding". Probably the wrong word to use as there was no imagining necessary as I did the calculation

Sorry if you misinterpreted what I said, I was referring to CGT at retirement as you wrote in your second paragraph.

I think we are talking different things here again. CGT is a capital gains tax, which does not apply to RAs, whereas the tax I am referring to is an income tax on the lump sum. Forgetting the name used for the tax though, you implied the person would be worse off paying this tax than they would have been paying income tax on the R7500 when earned. This is wrong. The income tax now would be at your current tax rate, whereas at retirement you would get taxed favourably on the sliding scale, starting at 0% up to 36%. Someone earning what the person in your example is would be far better off with the latter. This also ignores the fact that you have earned returns on the full amount every year until retirement, and then you get taxed. That compounding effect again.

As you mentioned in your second post (and you will see I also mentioned it) If you cannot work with money then RA's is a very good vehicle to save money with. If you do however have the will power not to waste on something stupid like a car or holiday then for me I will much much rather stay away from them.

[EDIT: Oops speed reading again made me misinterpret] Yeah, an RA is better for someone without discipline to leave the money there until retirement BUT an RA is a recommended investment vehicle for everyone. The first post covered this. The second post was merely in response to the other objections you put forward. I don't think we really needed to go beyond the first post to be honest. The tax benefits and added value at retirement are reason enough.

Then you missed the point, human nature is to seek what we want and to hear and what we want to hear. At the moment we are debating the validity of RA's, you feel it is a good investment, and I feel there is something I can do better with my money.

You are obviously entitled to feel as you please but I think the calculations showed that you in fact can't do better with your money. An RA is your best choice if you are saving for retirement but if someone is against them then it is there loss. It is ill advised to spread this opinion to others who may not know the truth though, and could believe you though.

 

[marco]

What crap! An RA can give you access to a portfolio with the exact same make up as Satrix. Your returns are dependent on your portfolio make up. Yes, they are affected by costs but nowhere near to the extent of creating a 20% difference based purely on the investment vehicle (all other things being equal).

And 30%pa returns with Satrix? Care to link to something showing those returns?

And you can't withdraw funds from an RA until age 55, death or disability.

http://www.sharenet.co.za/v3/share_performance.php?scode=STXIND

And that is only 37%. If you do some learning on investments as I have done over the past 15 years, you can do double that.
In my portfolio I have:
PNC
CML
MTA
IVT
All good for long term.
Just stay out of Gold miners and Resources.

 

[ClintZA]

http://www.sharenet.co.za/v3/share_performance.php?scode=STXIND

37%

A once off annual return of 37% does not equate to an "expected per annum returns" of 25 to 30% per annum! Your implication was that these returns are to be expected consistently:

You can expect about 25 to 30% pa gains. RA's about 6 to 10%.

I can quote you an RA porfolio that would have offered you a 55% return in one year (the Stanlib Small Caps fund about three years back). The following year that portfolio returned -20 odd%. Would it have been wise for me to go around telling people that they can expect returns on an RA of 55% per annum?

It is not the investment vehicle that dictates your returns but your portfolio choice. Yes, costs have an effect on your actual returns but they are never going to result in a difference of 20+% per annum as you insinuate.


Besides you could get access to an industrial index type fund on an RA if you so desire, although it would not be advisable (and you are limited by regulation 28). Diversification is a better bet. Here is an example of the Excelsior Industrials portfolio (as at 31 May 2012) as offered by Liberty on their platform :

Here are the returns on the Satrix Indi (as at June 2012):

Excelsior Industrials vs Satrix Indi

One year 23.22% vs 19.74%
Two years 24.27% vs 26.74%
Five years 12.44% vs 12.89%

How does that annual return of only 12% tie in with your assertion of expected returns? And how exactly did your post prove the inferiority of an RA again? After all that was the implication. If if boils down to costs then you'll find that, even if considering an old generation RA with higher costs, the tax benefits FAR outweigh those costs.

 

[ClintZA]

If you do some learning on investments as I have done over the past 15 years, you can do double that.
In my portfolio I have:
PNC
CML
MTA
IVT
All good for long term.
Just stay out of Gold miners and Resources.

What is your tax rate? 40%? Ok, I can offer you an investment that DOES offer you a guaranteed return of at least 40% per annum for the next 20 years (assuming you are 35 years old). An RA. Point me in the direction of one of your investments that offer that.

 

[Shayd]

Snip

 

[ClintZA]

Wow, you are getting very complex with this

It is Saturday, the brain is on strike but I am not sure my calculations agree with yours (I get the lump sum to be R3,833,509 and the unit price to be R6.73). Also those unit you are purchasing would cost you more each month as they go up in value. So in month 1 the units may have cost you R1 but the next month your R5295 would have bought less units as they now cost you R1.01 per unit.

Although, even in saying all of this, I am not certain what we are trying to get to here either. We have already established that an RA will be better for you. You appear to be twisting numbers to try and show that it does not benefit you?

What are you actually asking here?


PS Not taking the 1/3rd and benefiting from the tax free lump sum and favourable rates would affect your benefit.

 

[Speedster]

I will appreciate any replies here. (Obviously if you know how the stuff works)


....It is now 1992

Let us assume you contribute R5295 per month to a Retirement Annuity, I keep it at R5295 and never increase it (This is obviously a lot of money but I want to use this for the calculation)
Let us assume this Retirement Annuity is Linked to a Unit trust where the Price of 1 unit is equal to R1.00 on your very first contribution.
Let us assume this fund will grow at 10% pa compounded monthly for a total of 20 years.

I am not going to show all the calculations, so if my figures are wrong, please let me know.
My calculations show...

At retirement the value of 1 unit will be ~R7.3281
At retirement the total amount of money I contributed will be R1 270 800
At retirement the total units I own will be 553 264.7923
At retirement the base cost for each unit I own will be ~R2.2969
At retirement the total value of my fund is R4 054 365.1360

Now, for each unit that is currently worth ~R7.33 I contributed ~R2.30 and the growth equal ~R5.03
If I understand correctly, I will be liable for Income Tax on that ~R2.30 part only.

For simplicity lets assume I do not take any lump sum. (This should not effect my exercise here as it will not effect the current unit price nor the base price)

It is now 2012, I am a retired man and need my RA (now a linked-living annuity) to pay out a monthly "salary".

I now decide to sell a monthly total of 2305 units. (Which is 5% pa of my fund, again not important here)
I will now receive a total monthly payment of ~R16891.27
Of this monthly R16891.27, I contributed 2305*R2.30 = ~R5295 and the growth was 2305*R5.03 =~R11596

I thus have a monthly Taxable income of R5295 as I am only liable for tax on my contribution and not on the growth, luckily we currently do not pay tax on monthly amounts equal or lower than R5295 and as a result for this year I receive monthly "salary's" of R16891 completely tax free.

Thanks in advance!

I think you are overcomplicating the taxation process. Without getting into the detail of your calculations the principle is simple - on an RA you don't pay any tax on your monies deposited (as long as it's not more than the 15% threshold), nor do you pay any tax on income and capital growth earned by those investments. You do pay tax on the withdrawal of these funds based upon the sliding scale.

Hope that helps.

 

[ClintZA]

In my view this is such a crap reply that I'm actually angry/sad, especially as you have contributed so much.

I apologise, I considered adding a comment for you not to take it the wrong way, as it was not meant as such, but I felt the smiley face at the start may indicate this enough. Obviously not, sorry.

1. You asked what I'm trying to get to here. I'm asking someone who knows how the taxation on an RA work to see if my calculations are correct. My opening line states that if you do not know how it works then there's no need to reply.

I do know how it works, and stated how it works in my initial responses, therefore I assumed this post was trying to achieve something else. My concern was that it was in fact asking the same thing hence me adding the (possible rude -apologies) comment about twisting things. I also mentioned that you were complicating things and it was a Saturday

To simplify it (but you seem to have a better understanding than most already):

Pre-retirement
Your contributions to an RA are allowable as a deduction for tax purposes based on an equation. The equation states you are allowed to deduct the greater of 15% of your non retirement funding income (NRFI), R3500 less your pension contributions or R1750. Any excess amounts are carried forward and applied in the following years. If they continue to carry forward until retirement (due to repeatedly contributing your maximum allowed amount) they will increase your tax free lump sum at retirement.

Non retirement funding income is any income which is not used to calculate your contributions to a company pension or provident fund. If you do not have a company pension or provident fund therefore then you can deduct the full 15% RA contribution for tax purposes.

Please note your NRFI is your gross income figure and not your net income.

Post retirement
1/3rd of your total retirement annuity fund value can (and usually should) be taken as a lump sum with the remaining 2/3rds being used to purchase you an annuity. The 1/3rd lump sum is taxed based on the sliding scale as mentioned earlier (with a slight correction of the values). First R315,000 it not taxed, next R315,000 at 18%, next R315,000 at 27% and the remainder at 36%.

The annuity will pay you a monthly income. If you choose a linked life annuity you can choose to draw an income of between 2.5% and 17.5% of your fund value annually. Obviously drawing 17.5% per annum on an investment that is returning less than this is risky as it will mean running out of funds if you were to live long. The income that you draw is taxed in your hands as any other income would be based on the income tax tables.


Tax on invested retirement funds within the fund
As mentioned earlier, your returns within a retirement fund are taxed more favourably than with any other investment.

2. We have indeed established that an RA will be good investment, the higher the tax bracket the higher the benefit. I have edited every single post I made, clearly highlighting the mistakes I made with RED and the amendments I added in BLUE. I did this so that every person who reads this thread later can see where I made mistakes and wrong assumptions. So that they can learn from this and make an informed decision. For you to now say "You appear to be twisting numbers to try and show that it does not benefit you?" is totally uncalled for.

I unfortunately read all posts in sequential order and until you now mentioned this I did not go back and read posts I assumed I had already read. I once again apologise for this. The fact you appeared to be asking the same thing again made me draw this (incorrect) conclusion. Although it was a question and not a conclusion.

3. If YOU cannot do the underlying calculation/mathematics then I certainly did not twist anything. In fact, if you actually read my post, you will clearly see that every single aspect of the hypothesis benefits or is in favor of RA's and the taxation thereof.

I did pre-empt everything i said by stating that it was Saturday and you were making things rather complicated. Something agreed to by another poster.

PS. Checked my numbers again and it all seems right, for you to say the units will go up in value is mind boggling as that is exactly what "Let us assume this fund will grow at 10% pa compounded monthly for a total of 20 years." mean. I think you merely replied here for the sake of replying, and not really to contribute to the thread. I might be wrong, you did in fact say it is Saturday.

I'm still trying to wrap my head around the way you calculated things. As mentioned repeatedly it seems like a rather complicated way of doing it. I know all our minds work differently so clearly mine does not work the same way as yours. I do get some different numbers to you for some of those values but they are not large variances so it will not really affect what you are trying to achieve with your workings.