Do not simultaneously halt your retirement annuity (RA) fund contributions and increase your contributions to your occupational retirement fund as a consequence of the new retirement fund tax regime before doing your homework.
The increase in the permissible percentage of your contributions of your pensionable income that you can deduct from your taxable income from March 1 means that you need to do some calculations and make some decisions, particularly if you are a member of an occupational retirement fund.
The increased deduction limits below the new rand limits on contributions mean that most income earners will be able to increase their monthly contributions significantly above their current contributions.
If you are a member of an occupational fund, you may find, however, that there may be no further need to contribute to a RA fund, because you can cost-effectively put all your contributions into your occupational fund.
However, there are few things you should consider before you ditch your RA fund for future contributions. These include:
- You can keep an RA open, even when not contributing, well past the date you retire from your occupational fund. There is no forced age limit on maturing an RA. This means you can use the money to top up your pension and counter the effects of inflation later in your retirement.
- When you receive a fund pension, the pension will stop when you die or when your partner dies. This has two consequences, namely: the spouse’s pension is normally a percentage (between half and two thirds) of your pension, and there is no money available for your heirs. By using an RA for your extra savings you can provide a top pension for your partner, and your dependants can be nominated as beneficiaries if you die while the RA is in force; or the pension proceeds can be passed on to them if you buy an investment-linked living annuity (pension) with the proceeds.
- Estate planning (see below).
If you do make an RA “paid up”, the money must remain invested until you reach at least age 55 – the earliest date of retirement from an RA.
* Costs. The costs, particularly the asset management costs, of an occupational retirement fund are usually far lower than for a RA. This, however, is not necessarily always the case, particularly if you are a member of an umbrella fund sponsored by the financial services industry. High costs mean lower end benefits.
- Estate duty, which is 20 percent of your net assets (assets less liabilities) less the abatement of R3.5 million.
- Capital gains tax (CGT), which is applied on the gain in capital value on most assets from the point of ownership to disposal or death. The effective rate of CGT, depending on your income tax rate, ranges from zero to a top rate of 13.3 percent if you are on the top marginal income tax rate of 40 percent.
The Estate Duty Act excludes retirement benefit lump sums and annuities from the estate of a deceased person. Any benefit taken by a beneficiary in the form of an annuity (a regular payment) will be added to the gross taxable income of the annuitant (beneficiary) and taxed as such as part of the annuitant’s (beneficiary’s) income. Any lump sum withdrawn by the beneficiary will be taxed in terms of the lump-sum scales for the retirement funds with the first R315 000.
(Note: No death taxes apply to assets bequeathed to a spouse.)
In other words, the beneficiary in effect becomes the new pensioner with all the tax advantages held by the initial RA member.