• Intro
• Products
• Retirement Annuities
• Preservation Funds

Types of Retirement Products

There has been a general trend from defined benefit pension funds to defined contribution pension funds. This means that employers do not commit themselves to providing you with a pension but only that they will make contributions to a pension fund. This has the effect of transferring both the risk and the responsibility to the employee. Should the pension fund perform well, you will probably receive a higher pension than would have been the case for a defined benefit fund. However, if the pension fund performs poorly, the converse will apply.

Besides pension funds, there are a range of other retirement products. These products are offered by insurance companies and linked product companies. Equinox.co.za will offer its own retirement products in the near future.

A word of advice : make sure you understand the products you are buying and know all the fees that are being charged and will be charged in future. These can make a significant difference to the investment performance and ultimately your financial security on retirement.

Retirement Annuities (RAs)

• RAs are a tax effective way to accumulate retirement capital. Contributions are tax deductible subject to certain caps.
• On retirement, one third can be withdrawn as a cash lump sum. Part of this lump will be tax free. The remaining two thirds must be used to buy a life or living annuity.
• Anyone can buy a retirement annuity, there is no need to be employed. Retirement annuities are suitable for self employed people and employees who wish to purchase additional retirement benefits.
• Previously, members of retirement annuity funds were required to retire at the age of 70. However, recent amendments to the income tax act abolished the maximum retirement age. The consequences of this are wide ranging; a member need not ever retire from an RA. Members who have sufficient alternative funds to live on can postpone the transfer the assets in the retirement annuity to beneficiaries after the death of the member.
• You cannot access a retirement annuity before the age of 55.

Pension Funds

• Employee contributions of up to 7.5% of retirement funding income are tax deductible. Employer's contributions are also deductible from the employer's taxable income.
• On retirement a pension fund member may only withdraw one third of their benefit in the form of a cash lumpsum. Part (and in some cases all) of this lumpsum will be tax free.
• The balance of the lumpsum and the monthly payments will be taxable.
• Pension funds are not subject to income tax other than interest and rentals, both of which are taxed at 25%.
• Most defined benefit pension funds have been closed to new members and they are also encouraging existing members to opt for defined contribution funds.
• Pension funds have the effect of deferring the tax payable. While you will, in your personal capacity, be paying tax on the growth of the fund, the tax is likely to be at a lower tax rate than at the time you were making the contributions.
• You need to be employed to make contributions to a pension fund.

Provident Funds

• Employee contributions are not tax deductible. Employer's contributions are tax deductible.
• You need to be employed to make contributions to a provident fund.
• On retirement the entire benefit can be withdrawn as a cash lumpsum. Part of the lumpsum would be tax free. Any annuity received from a provident fund would be taxable.
• If funds are withdrawn from a provident fund before the age of 55 (males) and 50 (females), the withdrawal will be taxable.

Life Annuities

• Life annuities are usually purchased with the proceeds from retirement annuities and pension funds (usually with the two thirds but the lumpsum can also be used). The benefits paid out by provident funds (on retirement) may also be used. There are different tax implications in each case.
• A life annuity pays you a regular amount for the remainder of your life. There is no accrual to your estate unless life insurance was built into the contract. These annuities would be a good choice if you expect to live for a long time. The monthly annuities may be indexed to inflation in some instances.
• Annuities are taxed on receipt.

Living Annuities

• A living annuity is a form of life annuity and is a relatively new product.
• The funds are invested in a combination of equities (or equity unit trusts) and interest bearing instruments so as to comply with the prudential guidelines for retirement funds. (Alternatively, the funds can also be invested in a prudential unit trust). The investment risk and returns are for your account, you are not guaranteed an income into the future. The balance of your investment is passed on to your heirs when you die. You are compelled to withdraw between 2.5% and 17.5% of the capital value every year. You usually have a high level of control over your investment and can switch the underlying investments (these products are usually offered by linked product companies). As you are accepting the risk, you should expect the returns to be higher as well.
• The annuities are taxable on receipt.

Term Annuities

• An annuity is purchased with a lumpsum investment. A typical period would be 5 or 10 years. The remaining value, if any, is paid back to you at the end of the period.
• While the original lumpsum investment is not tax deductible, the portion of the annuity that amounts to a return of capital would not be taxable on receipt either.
• You should assess whether the effective return on your investment is attractive relative to the alternatives, for example a bond fund. The fees charged may make it less attractive than the simpler alternatives.