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How to get a retirement annuity to work for youThe taxman will also allow you to deduct, in future tax years, the disallowed portion of this year's contributions THE end of the tax year is looming and that means its time for retirement annuities to come to the fore as taxpayers rush to top up their contributions. A retirement annuity (RA) is a popular long-term investment product. It's used by self-employed people as a retirement savings tool and also by prudent employees to supplement their company pension or provident fund. The major reason for the popularity of RA funds is that the taxman sponsors part of it: up to certain limits, your contributions are tax deductible. This benefit greatly enhances the investment returns of RA's and makes them worthwhile retirement savings vehicles - but don't contribute more than your tax deductible limit because you'll be better off investing that money into a higher-performing and more flexible asset (like a suite of quality unit trusts). Here's a summary of what RAs are all about: What are the tax limits? To a self-employed person, the limit is 15% of taxable income. To an employee it is the greatest of these three: R1 750 or R3 500 less the tax deductible contributions to your firm's pension fund or 15% of non-pensionable earned income. The taxman also allows you to deduct, in future tax years, the disallowed portion of this year's contributions. In addition, you can deduct up to R1 800 each year for contributions paid to reinstate a lapsed RA policy. Your contributions. You can make a one-off lump sum contribution, called a single premium policy, or you can make recurring contributions at regular intervals. Your recurring contributions are flexible: you can increase or decrease them; have an automatic inflation-linked rise in premiums to a maximum of 20%; and you can make extra lump sum payments. Your returns. The growth on your contributions depends on the company you invest with, the asset portfolio you choose, and the costs on the policy. Traditional RA policies are sold by life assurance companies, and you can choose portfolios ranging from equities and unit trusts to foreign assets and a balanced portfolio. Then there's the new breed of RA, sold by unit trust-linked product companies - these allow you to choose from the 105 unit trust funds now on the market. The debate as to which type is better rages on: the linked RA offers you more asset flexibility and transparency of costs, but a traditional RA offers conservative investors the safe haven of a smoothed bonus portfolio. Be careful when choosing your asset portfolio in a traditional RA - the difference in actual annual returns can be over 10%. Be careful too when choosing a life assurance company: its investment skill (or lack thereof) directly affects your ultimate nest egg. The returns for linked policies depend on the unit trust funds chosen. And this is the risk of a linked RA - you or your financial adviser may not have the expertise to manage your assets. The costs. Traditional RA policies: commission, admin charges, a monthly policy fee and an annual service fee. Commission and admin charges are usually deducted in full over the first two years of the policy (this significantly reduces your fund's growth). The amount of commission you'll pay depends on the premiums and on the period. The commission terms are standard in the life insurance industry: for the maximum RA period of 25 years, you pay 75% of your first year's contributions, and in the second year, you pay 20% to 30% of the first year's contributions. Linked RA policies: There is a management fee, broker commission, as well as an annual management fee and advisory fee to the broker. Commission is up to 3% plus an ongoing 0,25%. When do you get the money? This is the inflexible part of an RA. You can only access it once you've hit 55 (but you can leave it until you're 70). You do not have to stop contributing to your RA when you take up your pension or provident funds; you can also stagger your retirement from an RA. There are only two instances when the 55 minimum age does not apply: on the permanent disability or death of the policyholder. What happens when you retire? You can only take up to one third of your benefit as cash. The rest must be used to buy an annuity (a regular monthly income). Are you taxed on these amounts? Alas, its payback time for the tax deductions on your contributions. Your lump sum withdrawal will be partly tax-free (but this is under current tax law and changes are in the offing). Your regular annuity income will be taxed when you receive it (again tax changes are coming). Life cover. Life and disability cover can be tagged onto your RA, but this will increase costs, and so lower returns, on your policy. You can have a contributions waiver where the life company will continue paying your premiums if you are disabled. These options are unavailable to linked RAs. When buying a traditional RA, ask your financial adviser if he/she is an agent, a broker or a bank broker. An agent is a salesperson of that company and will offer you only that company's wares. A broker has freedom to sell different companies, and a bank broker may be influenced to sell a certain life assurer's policies.
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