RA season is here

As the South African tax year is the end of February , during January and February it is appropriate that South African tax payers should review their retirement contributions, writes Liz Still, Research Editor of PSG Online/ Equinox.

Taxpayers most likely to benefit from a Retirement Annuity (RA) investment include those who are self employed, those who earn commission as part of their salary package, those who earn income from multiple sources, and those whose employers may not be contributing the maximum permitted allowance to a pension or provident fund.

South African taxpayers are allowed certain retirement deductions from their taxable income. This is the government’s way of encouraging you, the tax payer to become more self sufficient in your retirement. This ‘benefit’ is not entirely free of obligations, (see below), but the tax benefits are compelling. The discipline involved with investing in a Retirement Annuity also has much merit.

‘RA season’ comes about because it is not a requirement that contributions to a retirement fund be recurring in order to be deductible for income tax purposes. Many tax payers are unable to calculate or project their earnings at the beginning of the tax year, and therefore make an educated guess on an appropriate retirement contribution. A single premium contribution to a new or existing policy thus offers investors an easy way of topping up retirement contribution.

The SARs deadline for this top-up is the end of the tax year, but at PSG/ Equinox our administrative deadline is February 16^th 2012 in order to be able to process the volume of applications we receive annually in RA season. 

What is a Retirement Annuity?

Retirement annuities were first introduced in South Africa in 1960 and were designed to enable self-employed people to qualify for the same deductions as those employees who were provided for by their employers by way of provident or pension funds.

However, RAs are now widely used by wide range of investors. An investor can have more than one annuity as each annuity has a separate contract with the fund. Investors can have a number of membership contracts with a retirement annuity fund. They can choose between:

1. A contract with a fixed monthly amount, called a recurring premium retirement annuity, to which investors can add once-off or top-up payments; or

2. A once-off contract with a fixed contribution, called a single premium retirement annuity.

What are the advantages of Retirement Annuities?

Subject to certain limits, retirement annuity contributions are tax-deductible and when you retire from the fund, the proceeds are either tax-exempt or favourably taxed in the hands of the taxpayer.

This means that you can effectively defer tax liability from when you are working (and are likely to have a high taxable income) to when you are retired, when you are likely to have a lower income.

Furthermore, assets within retirement annuity funds are not taxed, they are not subject to either Capital Gains Tax, which taxes the growth of assets, or the new Dividend Withholding Tax, which taxes 10% of the value of dividends received by tax payers per annum.

The Income Tax Act permits an employer to reduce the amount of Pay-As-You-Earn (PAYE) tax deductible against an employee’s remuneration by the amount of the employee’s retirement annuity contributions, subject to certain limits. This practice enhances an investor’s retirement savings. If, for example, a taxpayer has a marginal tax rate of 30% and would like to contribute R1,000 per month, he/she would be able to save R1,429 per month as opposed R1,000 if the monthly PAYE deduction wasn’t allowed.

A retirement annuity fund does not form part of one’s estate for estate duty purposes. It’s therefore not subject to estate duties, which currently are 20%.

A retirement annuity fund is consequently also not subject to executors fees, which currently are up to 3% plus VAT.

A retirement annuity fund cannot be attached by creditors and is therefore protected against insolvency. This makes these funds especially attractive to taxpayers involved in high risk business ventures and safeguards their income for retirement.Only a limited number of institutions or people may claim money invested in your RAs. These include the South African Revenue Service (in the case of unpaid taxes) and a previous spouse (in terms of a court-approved divorce settlement).

What are some of the disadvantages of Retirement Annuities?

Underlying holdings in retirement fund portfolios must comply with Regulation 28 of the Pension Funds Act.  Regulation 28 is designed to ensure that assets are invested according to certain guidelines as defined by the Pensions Fund Act.

Two aspects of Regulation 28 which are considered somewhat restrictive. The first is the maximum permitted level of exposure to equities; this is currently 75%, and considered too conservative for younger investors.

The second is the permitted level of exposure to offshore assets; this is currently just 25%. At the beginning of the year the Price Earnings ratio of the All Share Index on the Johannesburg Stock Exchange, (a general guide for the relative price of assets) was 13, while the global average was 11. The lower number suggests that better value is to be found offshore. However, investors should remember that they are welcome to use post tax money to invest either offshore or in particular equity investments.

Pension fund legislation is designed to ensure that payments to pension funds, retirement annuities and pension and provident funds is ultimately for the benefit of the general tax payer and then his or her beneficiaries.

An implicit contract is undertaken if investors take advantage of the tax deductibility of these vehicles; any money left at the time of the death of the investor has to be divided between those who were dependent on the tax payer. In terms of the rules of retirement funds, you, the investor are not therefore at liberty to bequeath the proceeds of any retirement fund to a neighbour, your personal instructor, or even to a charity if you have dependents.It is the responsibility of the trustees of the fund concerned to ensure that family members who depended on you while you were alive receive the benefit of your fund after your death.

What are the different types of Retirement Annuities?

Some investors still associate retirement annuities with a lack of transparency, poor investment choices, a lack of flexibility with respect to switching between funds and high broker commissions.

However, to some extent linked investment platforms such as this one were born and developed in response to the opaque offerings of previous decades. Unit trust based (as opposed to insurance company based RA products) are therefore generically referred to as ‘New Generation’ RAs.

One of the major benefits of investing directly in a Retirement Annuity through the PSG Online /Equinox platform, is that should you be comfortable to make your own fund selections, is that you can save the advisor fees. You will recognise many household brand unit trust funds in the list below, and can research them in greater detail using the information on our website www.equinox.co.za

Our fees are transparent and we offer a comprehensive selection of investment choices. 

How much can I invest in an RA before the end of February?

The tax deduction for contributions to a retirement fund is based on a number of factors and is currently limited to the highest of the following;

15% of your non-retirement funded income for the year;

R3,500 less your allowable pension fund contributions; or

R1,750.

As February draws closer you should calculate whether or not you have contributed the maximum allowance of 15% of your non-retirement funded income and then ensure that you pay this amount to a retirement fund in time.

Which funds are available to Equinox /PSG Online clients?

Prudential High Equity Funds: Analytics Balanced Fund of Funds (B)

Prudential Low Equity Funds: 4i Stable Fund of Funds, Allan Gray Stable Fund, Analytics Cautious Fund of Funds (B), Coronation Balanced Defensive Fund (A), Nedgroup Investments Stable Fund, N-e-FG Income Provider Fund of Funds, Skyblue Kimberlite Cautious Fund of Funds (A).

Prudential Medium Equity Funds: Analytics Moderate Fund of Funds (B), Platinum Balanced Prudential Fund of Funds, PSG Alphen Prudential Fund of Funds

Prudential Variable Equity Funds: 4i Balanced Fund of Funds, Allan Gray Balanced Fund, Cadiz Managed Flexible Fund, Coronation Balanced Plus Fund, Foord Balanced Fund, Intervest Prudential Fund of Funds (E), Metropolitan Managed Fund, Momentum Balanced Fund (A), Nedgroup Investments Managed Fund (A), Prudential Balanced Fund, PSG Balanced Fund, SIM Balanced Fund (A), Skyblue Cumulus Moderate Fund of Funds (A), Stanlib Balanced Fund (A).

Asset Allocation Flexible Funds: Investec Opportunity Fund (B), Seed Flexible Fund

Targeted Absolute and Real Return Funds: Nedgroup Investments Positive Return Fund, Prudential Inflation Plus Fund

Fixed Interest Varied Specialist Funds: Old Mutual Enhanced Income Fund (A), PSG Optimal Income Fund

Money Market Funds: Allan Gray Money Market Fund, Investec Money Market Fund, Old Mutual Money Market Fund

How do I actually go about investing in an RA on the Equinox platform?

If you already have an Equinox RA portfolio and if we have a record of updated FICA documents:

1. Complete the RA additional contribution form.

2. Submit the completed; signed form to Equinox via fax or email together with proof of the deposit made by close of business on the 16th of Feb.

Please note if a cheque deposit is going to be made you need to keep in mind that a cheque takes a while to clear (please confirm with your bank exactly how long); so you will have to deposit your cheque in advance to ensure that the amount has cleared and is available for investment by close of business 16 Feb.

If you have an Equinox account but do not have an Equinox RA portfolio yet:

1. Complete the RA application form (can be found on the website)

2. Submit the completed & signed form to Equinox via fax or email together with proof of the deposit made by close of business on the 16th of Feb.

Please note if a cheque deposit is going to be made you need to keep in mind that a cheque takes 5-7 working days to clear; so you will have to deposit your cheque in advance to ensure that the amount has cleared and is available for investment by close of business 16 Feb.

If you do not have an Equinox account at all:

1. Complete the RA application form (can be found on the website)

2. Submit the completed; signed form together with the applicable FICA documents to Equinox via fax or email if the investment amount is LESS than R60 000 . Originally certified via post if the investment amount is R60 000 or more together with proof of the deposit made by close of business on the 16th of Feb.

Please note if a cheque deposit is going to be made you need to keep in mind that a cheque takes 5-7 working days to clear; so you will have to deposit your cheque in advance to ensure that the amount has cleared and is available for investment by close of business 16 Feb.

Also note if you wish for the investment amount to be collected from your bank account, we would also need to receive a signed ‘bank account mandate’ (available online once the investment instruction has been loaded) giving us authority to collect from your bank account.

When is the deadline?

The deadline by when all documents must be received and deposits reflecting in our bank account, is close of business 16 Feb.