A retirement annuity is a way of ensuring that you will receive income after you retire. You make contributions to the annuity while you are still working and earn a set income for life during retirement. A retirement annuity is very attractive for self-employed individuals and business people. Employees with employers that are not contributing towards their pension fund can also benefit from a retirement annuity.
A retirement annuity is a tax deferred investment, you can contribute money that would have gone towards tax to your RA. The maximum is 27% of your monthly income and not more than R350 000 per year. The government doesn’t want you to depend on the state when you are older, this is why they encourage you to save for retirement.
How does a retirement annuity work?
You make contributions towards your retirement annuity in a form of monthly contributions or a fixed-deposit. The minimum amount of money that you can put towards your retirement annuity in South Africa is around R500 per month from most FSPs. You can only get your money when you reach retirement age, this is age 55, you cannot withdraw or access your money before then.
When you retire from the fund; 1-third of your money can be withdrawn and is tax free. You can withdraw up to R500 000 tax free. The amount of money you receive will after that should last you for life. Other annuity plans include your spouse, your spouse will receive monthly payments until he/she passes on long after you have passed on. Annuities pay out an income that you can’t outlive.
How much exactly will you earn?
The amount of monthly income you will earn in retirement is determined by the monthly contributions you make or fixed deposit. It’s best to speak to a financial adviser, this will allow you to make a retirement plan that will sustain you.
How safe are retirement annuities?
Retirement annuities are very safe, so safe that even creditors don’t have access to your money. Even yourself don’t have access to your money before age 55, with the exception of emigration.
Annuities are usually offered by insurance companies and other asset management companies. It’s your responsibility to do a thorough background check on these companies. Buy annuities from companies with a proven track record, the older the company; the better in most cases. It would be unwise to buy annuities from a company that is less than 5 years old.
There are different types of annuities, some are inflation linked and others make fixed payments. It’s always best to do some research and choose the one that’s best for you.
Disadvantages of annuities
The main disadvantages of annuities are the hefty fees, complexity, and lack of liquidity. Many retirement annuities are sold through agents that earn commission. These agents typical focus on earning the best commissions for themselves and might lead you into getting into a contract with hefty fees.
Insurance companies have a lot of fees and penalties. The industry average is 3% per year, which can end up costing you over 40% of your money at retirement. Asset management companies typically charge annual fees of 1% or less and don’t have a lot of hefty fees that are charged by insurance companies.
Retirement annuities are extremely complex and difficult to understand, some investors stay away from annuities for this reason.
Conclusion
This was a guide on how retirement annuities work, retirement annuities are very complicated. Your asset management company will answer most questions you might have. Do you have any thoughts or questions? Comment below.
