Financial security in retirement: Get the most from your retirement annuity

Jun 27, 2024 11:21:02 AM

"A retirement annuity lets you specifically save for your retirement by putting money into a dedicated investment fund that grows your money. You can only access this fund when you turn 55, although you can continue to let it mature beyond that."

Financial security in retirement: Get the most from your retirement annuity

By Jessie Taylor

Around half of South Africans have no retirement savings, according to the latest 10X Retirement Reality Report. Estimates are that only a third of South Africans have a relatively solid grasp of what is necessary to fund their retirement years.

A key reason for the low savings rate is affordability, with 70% of survey respondents saying they cannot afford to save as they have nothing left at the end of the month.

“The difference between what South Africans expect their retirement to look like and the realities faced by those in retirement and approaching it cannot be underestimated,” concludes the report.

“Knowledge and information are key to closing the expectation-reality gap – in their long-term interests, South Africans need to be better informed on the importance of saving, the power of compound interest, the consequences of not saving, the additional disadvantages that women need to overcome, and the impact of costs.”

The report is a sobering reminder of the importance of financial products such as retirement annuities.

A retirement annuity lets you specifically save for your retirement by putting money into a dedicated investment fund that grows your money. You can only access this fund when you turn 55, although you can continue to let it mature beyond that. A retirement annuity is a way to save so that you can pay yourself an income in retirement.

With a retirement annuity, you use money you would’ve paid in tax to save. When you contribute to your retirement annuity, whether monthly or a lump sum, you’ll be able to claim back the tax on all or a portion of your contribution at the end of the tax year. You also don’t pay any tax on the growth of your money, and your savings will grow exponentially thanks to compound interest.

Once you reach retirement age, you’re allowed to access up to one-third of your money, capped at R500 000 in a lump sum tax-free. After that, you either get paid a monthly income or can access an income from it on a flexible basis.

A retirement annuity offers a number of benefits:

Limited tax: Because paying tax on your proceeds is deferred until your retirement, you'll end up with a larger balance that’ll compound, tax-free, for as long as you keep your money invested.
Retirement income: Your retirement annuity will translate to a monthly pension at retirement, and you will be able to withdraw a tax-free lump sum of R500 000 at retirement age
Safe from creditors: Even if you are declared insolvent, your creditors will not be able to take your retirement annuity.
Only accessible at retirement: Even those who are not disciplined savers will be able to save for their retirement with a retirement annuity, as it cannot be accessed until the age of 55. This means your savings will only be available when they are most needed for your retirement income.
Security for your family: You can appoint beneficiaries who will benefit from your retirement annuity in the event of your death. Your beneficiaries can choose to receive a share of your retirement annuity as a cash lump sum, an annuity, or a combination of the two.
Flexible payments: With a retirement annuity, you can top up your monthly income with lump contributions (such as a bonus or tax return). While it's best to keep up with regular payments, you also have the flexibility to stop your deposits at any time.

Here are some tips to help you choose the best retirement annuity for your future:

1. Plan according to your life stage

Your age and income will have a big impact on what decisions you make when choosing a retirement annuity. If you’re younger and have many years before your retirement, you can afford to take higher risks with your investment. As your retirement age approaches, it is better to consider lower-risk investments that are more stable and will keep your savings safe.

2. Rather save small than not at all

It's better to save even a small amount every month than nothing at all. If you don't have a large amount available to save, start with just a few hundred rand a month. As your income increases, so too can your retirement savings. Over time, compound interest will ensure that your savings grow, so the earlier you start saving, the less you will need to put away in the long term.

3. Add up fees

The fees offered by many financial institutions might seem low, especially on a monthly basis, but over time, these can make a big dent in your savings when they add up over the years. When the time comes for retirement, you might find much of your investment has been chipped away by excessive fees. When choosing a retirement annuity, weigh up if the fees are fair, transparent, and offer you good value for the service you receive.

Sources: Sygnia | Standard Bank | Moneyweb