More about RAs and why they're the best way of saving for retirement:

Question:
I have a retirement annuity into which I regularly contribute at least 15 percent (usually more) of my salary each month. I have no other assets. Is having only a retirement annuity unwise?

Answer:
A retirement annuity is a very good investment tool for saving towards retirement. It is a long-term investment and cannot be accessed before age 55 (unless one dies or becomes permanently disabled). It is designed this way to prevent people from spending their pension and retiring with insufficient funds.

In South Africa, only six percent of the population will retire financially independent and will not rely on a government pension or their children to sustain them.

Given the fact that one needs about 70 percent of one?s final, working salary as a pension to be comfortable during retirement, an RA?s restrictions are necessary.

However, a person usually needs to invest for reasons other than retirement as well, such as saving for a holiday, a wedding or a university degree. It is also wise to have an emergency fund (of about three times one's monthly salary) invested in a liquid asset such as cash, for unexpected items such as car repairs or excessive medical expenses. If there is no emergency fund then one is inclined to use a credit card or loan facility to fund unexpected events and this is expensive.

The nice thing about having other savings and investments is that if you never use them then they can also be added to your funds at retirement anyway!

RAs: great for the following reasons:

  1. Up to 15 percent of non-pensionable salary can be paid into an RA and this contribution can be deducted from taxable income thereby reducing income tax.

    What do I mean by 'non-pensionable salary'? Well, if you are not contributing to a pension or provident fund then your whole salary is 'non-pensionable'. If you are contributing, then that portion of one?s salary not used in your pension percentage calculation (such as a bonus) can be used plus any other taxable income (such as rent received). Depending on your tax rate, this can be quite a saving (from 18 to 40 percent)!

  2. The investment returns within an RA are not subject to tax. This means that over time this tax saving is also added to the RA investment, resulting in greater returns.

  3. In the case where more than 15 percent is being contributed, then the contribution not qualifying as deductible at that time can be added to the tax free amount at retirement. This can be quite complicated and one would have to prove that a tax deduction was never given for the amount claimed.

When is an RA not beneficial? Go to page two for the answer...

  • Have you got a Personal Finance question? Click here to ask our experts.