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by Caroline Foden

If you have a lump sum of money and are contemplating what to do with it, consider adding it to your retirement annuity before the end of February. There are many compelling reasons to do so, but first a refresher on retirement annuities.
A retirement annuity (RA) is a retirement fund in terms of the Pension Funds Act. Your funds will be invested in a variety of investment funds, but the overall asset allocation must fall within certain limits.
Tax advantages: The investment contributions you make are tax deductible within certain limits, being 27.5% of the higher of your taxable income or gross remuneration in that tax year, capped at R350,000 per year. This 27.5% includes contributions you make towards a pension and/or provident fund.
Further tax advantages: Returns generated within retirement annuities are not subject to income tax, capital gains tax, or dividend withholding tax, so your money will grow faster than in an equivalent portfolio in another investment vehicle.
Protection: Your money in an RA is protected against claims from creditors.
Estate duty exemption: You nominate beneficiaries, and any lump sum payment on your death will be taxed as a retirement benefit as though it had been received by you prior to your passing.
Retirement age: You can retire any time after age 55. You may take up to one third in cash and the remaining two thirds must be used to purchase an annuity to provide an income.
So why should you top up your RA?
Firstly, saving extra towards retirement is always a good idea. Most South Africans reach retirement age with nowhere near enough money saved to support them in retirement. We are living longer, and the average pension or provident fund will just not give you enough to live off in your golden years.
Secondly, adding to your RA will give you a significant tax break now. If you haven’t yet reached the cap of 27.5% contributions to retirement funds, then anything you add to your RA under that cap will qualify for a refund from SARS when you do your next tax return. You can use the money refunded to further add to your RA, or for other financial needs you have. For example, if your only source of income is a salary of R500 000 and you don’t contribute to a retirement fund, 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%) to your RA, you will pay tax of R67 347, which is a saving of R46 461.
Finally, you should base your decision on your overall financial/retirement plan, which should tell you whether you are on track to retire with sufficient capital to provide a sustainable income for you in retirement.
Consult your Adviser and discuss your personal circumstances and the best course of action to take.

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