Retirement Annuities

A Retirement Annuity (RA) is often referred to as a "policy". Legally, an RA is not a policy. When you take out an RA, you are, in fact, signing up for membership of a pension fund, a fixed amount of money you’ll receive on a consistent bases, which is administered in terms of the rules of the fund and governed by the Pension Funds Act.

Unlike an employer-sponsored pension fund, which has restricted membership, any individual under the age of 70 may join an RA fund.

When you become a member of an RA fund, the fund makes investments in the stock market on your behalf, normally purchasing a life insurance policy from the life company that set up the RA fund. Usually, the life company that established the fund also administers the fund.

A single life insurance policy may be bought for all the members of the RA fund, in which case the members receive a document that is little more than a certificate of membership. Alternatively, individual policies may also be bought by the fund.

With non-life insurance RA funds, such as those offered by some unit trust companies, you will be a member of the fund only and will receive a membership certificate.

The life insurance policy bought on your behalf is not the same as a normal endowment policy, which pays a lump sum on its maturity, because it is structured to take advantage of the tax incentives provided by the government to encourage you to save for retirement.

However, an RA is similar to a defined contribution pension fund, because at retirement you will have to use at least two-thirds of your savings to buy an annuity (a pension).

RAs were introduced to South Africa in 1960 to give self-employed people similar tax incentives to save for retirement as those enjoyed by members of employer-sponsored pension funds. However, this does not mean that only self-employed people can use RAs to save for retirement. People who are members of employer-sponsored pension funds can also join RA funds. In fact, it is advisable that every member of an employer-sponsored retirement fund also contributes to an RA, because most employer-sponsored funds will not provide you with a lot income in retirement to maintain your pre-retirement standard of living.

However, you should only contribute to an RA if you will receive a tax advantage. If you contribute to an RA using money that has already been taxed, you will pay tax on the money again when your RA matures.

McCulloch says that membership of an RA fund is no substitute for contributing to an employer-sponsored fund. He says an RA should be used "to supplement an employer-sponsored fund". The reasons include the fact that the total (employer plus employee) tax-deductible contributions to an employer-sponsored fund are greater than the tax-deductible contributions to an RA fund.

Gordon says you must also remember that when your RA matures, you are obliged to buy a monthly pension with at least two-thirds of the lump-sum payout from your RA. "An RA is a trade-off. The state gives us tax concessions as an incentive to save. Therefore it places limitations on what we can do with that money," Gordon says.

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