RA REDUCES YOUR TAX LIABILITY
I am 57 and will be retiring soon. Is starting a retirement annuity (RA), even later in life, worthwhile?
Alexi Coutsoudis, a financial adviser at PSG in Umhlanga Ridge, Durban, responds: The simple answer is yes. Retirement fund contributions reduce your taxable income, which is your total income or remuneration after the exemptions and allowable deductions.
For example, let us assume that your only source of income is a salary of R500 000 and that you do not contribute to a retirement fund. If you do not contribute the maximum deductible amount to an RA, you would pay tax of R113 808 (based on the 2018/19 tax rates). If you contribute the maximum amount of R137 500 (R500 000 x 27.5%), you will pay tax of R67 347, which is a saving of R46 461. In effect, you contributed R91 039 to your retirement fund and the South African Revenue Service contributed the other R46 461. Another way to look at it is that the guaranteed return on your investment of R91 039 is R137 500, or 51% – not bad without assuming any investment growth.
What should also guide your decision to invest is your overall financial/retirement plan, which should indicate whether or not you are on course to retire with sufficient capital to provide a sustainable income for you to maintain your standard of living in retirement (the goal of saving for retirement). It is best to consult a professional with the Certified Financial Planner accreditation, who will take your circumstances into account before advising you on the best course of action and devising a plan for you.
Another reason you should consider adding to your retirement savings is that, even if you cannot use the tax deduction now, you do not lose the tax benefit, because disallowed retirement fund contributions in any tax year are carried forward indefinitely, and will either lower your tax on lump sums at retirement or reduce the taxable portion of your annuity income.
DISCRETIONARY OR RA INVESTMENT?
As an ardent reader of Personal Finance, I was encouraged to invest in retirement annuities (RAs), which I have done for a number of years.
As I have passed the various thresholds for lump-sum contributions, any further RAs that I may take out would result in a cumulative 36% loss of my contribution, as well as a loss of 36% on any growth on the investment when I decide to retire. My question, therefore, is whether it would be better to invest in a conventional investment rather than an RA?
Pierre Puren, a financial adviser at PSG Wealth in Jeffrey’s Bay, responds: The answer to your question is a complex one, and many factors influence the final decision. The following considerations could help you to find the optimal balance for your needs.
You do not lose any contributions to your RA (capped at R350 000 a year) that exceed 27.5% of your annual taxable income or remuneration. If you state on your annual tax return that these contributions did not qualify for a deduction, they will be added to the tax-free portion of your lump sum (R500 000) when you retire from your RA. You do not, therefore, incur any losses, but merely defer the benefits of the reduction to your taxable income and tax liability. The growth on these additional contributions will benefit from the tax-free growth provided within the RA.
As a result of regulation 28 of the Pension Funds Act limiting the extent to which retirement funds may invest in certain asset classes – specifically, the 75% maximum allocation to equities – some would argue that an unconstrained investment in a discretionary investment (what you call a conventional investment) could offset the tax benefits provided by an RA. Many studies have been published that highlight the long-term equity-like returns from a portfolio constrained by regulation 28, so there may be some risk in assuming that unconstrained investments always provide higher returns.
Your financial plan will assist in determining how much liquidity you need before retirement. You cannot access the funds in your RA before the age of 55.
You cannot have direct offshore holdings in your RA, so you will have to use a discretionary investment if you want to invest in this asset class.
After your needs have been quantified, the option to put your excess contributions towards your RA is a viable one, because you will be able to access these funds, together with your R500 000 tax-free portion, at retirement, and provide sufficient access to liquidity for your post-retirement needs without having to pay tax on your lump-sum withdrawal. Tax-free growth is once again a factor, because contributions towards a tax-free savings account are limited to R33 000 a year.
Over and above the obvious advantages of RAs (protection from creditors and estate duty savings), possibly their most important attribute is that they protect investors against their own questionable investment decisions. Emotions often get the better of investors in adverse market conditions, and being able to access money in discretionary investments often results in withdrawals in favour of perceived “safe havens”, which materially impact investors’ long-term growth prospects.
Ensure that you familiarise yourself with the differences between new-generation RAs and traditional RA products, because traditional RAs are typically expensive and inflexible.
HOW TO INSURE VALUABLE JEWELLERY
I inherited several pieces of valuable jewellery from my grandmother who lived overseas before she died. What is the best way to insure and store them safely?
Luzanne Wait, a short-term insurance adviser at PSG in Jeffrey’s Bay, responds: The first step is to obtain a valuation certificate from a professional jeweller, who must be approved to provide such documentation. This proves that you own the items, as well as what they are worth.
The next step is to inform your broker or insurer about the items so that appropriate insurance can be put in place. Depending on your insurer, items under a certain value may not require a valuation certificate, so it is advisable to find out whether you will need one.
It is important to specify the items under the all-risk section of your policy, with the value attached to them. All-risk means you are covered at all times, anywhere, but insurers have requirements when it comes to specifying items, so it is best to check that, too.
If the items warrant a valuation for insurance purposes, you will either submit the valuation certificate to obtain cover or the certificate will be required only when you claim. However, the valuation must have been done before the incident for it to be considered valid. It is worthwhile to have your items revalued annually, to make sure you have sufficient cover, just as you would review your contents cover, as items can fluctuate in value over time.
A home safe is an option for storing valuable items. These safes have to comply with your insurer’s requirements – for example, they must be bolted to a wall.
If you wear an item infrequently, another option is a safety-deposit box at your bank. It is your responsibility to ensure that your insurance covers the item if it is stored in this way.
HOW MUCH WILL I HAVE IN 10 YEARS?
I want to contribute R1 500 a month to a retirement annuity (RA) for 10 years. Which companies can help me, and how much will my investment be worth after 10 years?
Anton Prinsloo, a financial adviser at PSG Wealth in Silverlakes, Pretoria, responds: Ten years is quite a long time, and I suggest you ensure that the RA invests mainly in growth assets (shares and property) within the asset-allocation limits imposed by regulation 28 of the Pension Funds Act. These limits are:
• No more than 75% may be invested in shares (whether in South Africa or abroad);
• No more than 25% may be invested in property;
• No more than 90% may be invested in a combination of shares and property; and
• No more than 30% may be invested in foreign assets.
Shares and property are volatile over short periods, but the yields are above inflation over the long term, and these are the only asset classes that protect you against inflation in the long run.
Most of the major investment houses offer RAs.
If you invest R1 500 a month in an RA over the next 10 years, with a return of 10% a year, you can expect your investment to be worth R302 000 in a decade.
Personal Finance will send readers the unedited answers to their questions. However, the questions and answers published in this feature may be edited for clarity or space.
Email your queries to [email protected] or fax them to 021 488 4119. This feature is sponsored by PSG Wealth.