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Retirement annuity questions & answers

What is a retirement annuity? How is a retirement annuity structured? What are the advantages of retirement annuities? What will your contributions be? Is the tax deduction you receive on a retirement annuity contribution really any good? What are the investment options in the retirement annuity? What are the tax benefits of a retirement annuity? What is pensionable & non-pensionable income? What is the maximum tax deductible contributions to Retirement Annuities? How many retirement annuities can you take out? How are retirement annuity retirement lump sum benefits taxed? How are retirement funds withdrawal lump sum benefits taxed? What happens to the retirement annuity if I die? Can you stop contributing to your retirement annuity? Can my employer contribute to a retirement annuity on my behalf? May a part of my accumulated credit in my retirement annuity be paid to my former spouse on divorce? Who pays the tax when I allocate a portion of my benefits to my spouse on divorce? Can I get access to my benefits in the Fund if I emigrate from RSA? What are the duties of the Board of Trustees when a member of a retirement annuity fund dies? Who qualifies for consideration for benefits by the trustees when a member dies? Should I update the beneficiary nomination on my Retirement Annuity? Can I nominate my estate as beneficiary on my Retirement Annuity? Can I nominate a trust or charitable organisation as beneficiary on my Retirement Annuity? What is Regulation 28 that my retirement annuity funds must comply to?
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What is a retirement annuity?

A retirement annuity is the policy which is selected by a member or prospective member of a retirement annuity fund and taken out by the retirement annuity fund to accumulate the capital to provide the member with an annuity at retirement. The member’s contributions to the retirement annuity fund are used as contributions for the policy. How is a retirement annuity structured? A retirement annuity is structured to provide you with a payout at any age from your 55th birthday. Legally, up to one third may be taken  in cash. The rest must be reinvested and the proceeds used to pay you a regular monthly pension for life.

What are the advantages of retirement annuities?

While there may be factors that could threaten your retirement provision, such as not being able to save enough, debt, inflation, essential household and nursing services and medical expenses, a retirement annuity provides you with one of the best retirement provision instruments available. You can put it to work in different ways – as a disciplined way of saving, or to top up your existing retirement fund. You can also make use of the tax concessions it provides.

What will your contributions be?

The affordable contributions start from a minimum of R200 per month for an investment term of 15 years or longer. The minimum contribution will however be determined by the product provider you select and the term of your retirement annuity. To boost your investment, you can inject extra lump sums at any time, and also increase the contribution by between 2.5% and 20% every year, to counteract the eroding effects of inflation. Is the tax deduction you receive on a retirement annuity contribution really any good? We will demonstrate by means of an example what effect the tax deduction you receive on a contribution towards an retirement annuity can have, or you can use the calculator for a personalised explination and them you decide if it is a good investment! Assume: i) A deduction of R 500-00 pm ( R 6000 per year ) are allowed, and ii) Your marginal tax rate is 25% ( Earning between R 174 551 - R 272 700 pa - Tax year 2014 / 2015 ). 1) If you don’t contribute the above mentioned R 6 000 towards a retirement annuity, you will have R 4500 (after tax) to spend or save in another product. 2) If you decide to invest in a retirement annuity instead of spending or saving the money (after tax) in another product as mentioned above, you are saving R 4 500 plus the subsidy of R 1 500 ( the tax you would have paid ) which adds up to R 6 000. This constitutes a immediate return of 33 % for the year on your savings ( R 1 500 on the R 4 500 ), before you have even earned a cent in the investment fund! * * If your marginal tax rate is 40 % ( Earning more than R 673 101 - Tax year 2014 / 2015 ), you would have been subsidized by R 2 400 on a payment of R 6 000, which constitutes a return of 66 % ! A return of 33 % pa, AND that is not where it ends! The fund you invest in within the retirement annuity vehicle is taxed at very favorable terms (interest earned, dividend income and capital appreciation are tax free). This means that if you don’t spend the after taxed money and decide to invest in a product other than a retirement annuity, the return would be less than received on a retirement annuity because of the taxation of the benefits received within the investment vehicle! Summary: 1) In the above mentioned example you receive 33% return on your money in only one year before you have earned a cent in the investment funds you select! 2) Your investment return is more in a retirement annuity if you compare the investment fund with a similar fund that is structured for voluntary (after taxed) monies. Calculate immediately how much you will be allowed to deduct or if you are still not convinced that a retirement annuity is an excellent savings vehicle for retirement, contact us with your questions or find a financial advisor in your town.

What are the investment options in the retirement annuity?

The Retirement Annuities offers you a comprehensive range of investment funds – from funds that fluctuate in accordance with the stock market to investment funds with optional guarantees that offer more security. You can choose to invest in one fund or spread your contribution among a combination of funds. The first step, however, is to determine the level of risk you are willing to take with your retirement savings, whether you’re looking for a high-, medium- or low-risk investment, or a combination of all three. You can use our risk profile calculator to help you to determine your investment choices that is right for your risk profile and savings objective. You also have the option when you request a quotation or apply for a retirement annuity, to instruct us to suggest funds that are aligned with your risk profile and savings objective.

What are the tax benefits of a retirement annuity?

Contributions are tax-deductible up to a certain maximum. Use the calculator to determine your maximum. Disallowed contributions can be carried over to the next year of assessment and, if unused during the total contribution period, can be offset at retirement to increase the tax-free portion of the lump sum, the annuity or other income. The funds you select within the retirement annuity are taxed very favourable. (interest earned, dividend income and capital appreciation are tax free) Your lump sum on death or retirement is tax-free up to R 500 000. Amounts more than R 500 000 on death or retirement enjoys a favourable tax-rate. You can deduct a further R1 800 per year in respect of arrear retirement annuity contributions. On death, any benefits paid out by way of an annuity are free of estate duty. If you leave your employer and receive a withdrawal benefit from your pension or provident fund, you can preserve your retirement benefit transferring it into an RA fund tax-free.

What is pensionable & non-pensionable income?

Pensionable income is the income used by your employer to calculate your pension or provident fund contribution. This income will typically include any fixed remuneration (e.g. salary or wages) but may exclude variable amounts such as commissions, bonuses and overtime. Non-pensionable income is your taxable income excluding (if any) your pensionable income, retirement fund lump sum benefits, assessed losses and capital gains.

What is the maximum tax deductible contributions to Retirement Annuities? 

The maximum deductible current contributions to RA fund(s) made during a year of assessment by a "natural person", is the greatest of: 15% of the non-pensionable income, or R3500 minus a deduction to which the taxpayer is entitled in respect of current deductible pension fund contributions; or the amount of R1750. Use our 'Retirement Annuity Tax Deduction Calculator' to calculate your deductions!

How many retirement annuities can you take out?

You can invest in as many retirement annuities (RA's) as you wish, but the tax benefit is determined in aggregate, not in respect of each  individual retirement annuity. The tax relief on contributions is limited to the formula discussed above, and the tax-free lump sum portion may be claimed only once.

How are retirement annuity retirement lump sum benefits taxed?

Taxable portion of lump sum Rates of tax R                0 - R    500 000 0% R    500 001 - R    700 000 18% of the amount over R 500 000 R    701 001 - R 1 050 000 R 36 000 + 27% of the amount over R 700 000 R 1 050 001 - + R 130 500 + 36% of the amount over R 1 050 000 The taxable lump sum cannot be set-off against any of your assessed losses. Click here to see the tax calculation at retirement or death!

How are retirement funds withdrawal lump sum benefits taxed?

Taxable portion of withdrawel Rates of tax R                0 - R      25 000 0% R      25 001 - R    660 000 18% of the amount over R 25 000 R    660 001 - R    990 000 R 114 300 + 27% of the amount over R 660 000 R    990 001 - + R 203 400 + 36% of the amount over R 990 001 The taxable lump sum cannot be set-off against any of your assessed losses. Click here to see the tax calculation at retirement or death!

What happens to the retirement annuity if I die?

Should the worst happen and you die, the value of the investment is available to your appointed beneficiaries and/or dependants. No executor’s fees are payable and your beneficiaries do not have to wait for the estate to be wound up before they have access to the money. In line with section 37 of the Pension Funds Act, the trustees of the retirement fund will distribute the proceeds, considering first the needs of your dependents and then the beneficiaries listed in your nomination form. It is thus important to keep your nomination up to date. Your investment will be taxed on the same basis as on retirement.

Can you stop contributing to your retirement annuity?

Yes. You can make your RA “paid-up”. This means you no longer pay monthly contributions; however you will stay invested until you retire. You may retire from age 55 onwards.

Can my employer contribute to a retirement annuity on my behalf?

Yes your employer can contribute towards a retirement annuity on your behalf. Where an employer pays the retirement annuity fund contribution on behalf of its employee (member) it is a taxable benefit for the employee, but also with a deduction for the employee within limits. The payment on behalf of the employee is a deductible expense for the employer.

May a part of my accumulated credit in my retirement annuity be paid to my former spouse on divorce?

Your accumulated benefit will only be affected if the Settlement Agreement made provision for the allocation of a portion of the 'pension interest' in the Fund to your former spouse, and this is made an order of the court. The Divorce Act and Pension Funds Act have specific requirements which must be met before the Fund has to make payment of any portion of your accumulated benefits to your former spouse. If you are contemplating divorce and are considering allocating a portion of your accumulated credit to your spouse, please consult with a financial advisor and attorney who is familiar with the relevant legislation and who will be able to highlight the potential pitfalls and ensure that all the requirements are met. If the requirements are not met, the Fund will not be able to make any such payment.

Who pays the tax when I allocate a portion of my benefits to my spouse on divorce?

National Treasury issued a Media Statement on 13 March 2012 advising that it intends amending the taxation of divorce orders that are paid by retirement funds on/after 1 March 2012. And the South African Revenue Services (SARS), which is responsible for the calculation and collection of taxes, has confirmed that administrators must now process the taxation of divorce orders in terms of this Media Statement. Therefore, for divorce orders paid on/after 1 March 2012 irrespective of whether they are paid from an occupational fund, retirement annuity fund or public sector fund will be paid as follows: Divorce Orders Issued: Pre-13 September 2007 non-member spouse makes election on or after 1 March 2009, but before the member's exit from the fund - untaxed non-member spouse makes election on or after 1 March 2009, but after the member’s exit from the fund - untaxed Post 13 September 2007 divorce orders non-member spouse makes election on or after 1 March 2009, but before the member’s exit from the fund - taxed (non-member spouse is taxpayer) non-member spouse makes election on or after 1 March 2009, but after the member’s exit from the fund - taxed (non-member spouse is taxpayer)

Can I get access to my benefits in the Fund if I emigrate from RSA?

The Income Tax Act has been amended to allow a member who has not yet retired but who has ceased the payment of contributions towards an annuity contract and has emigrated, to receive upon written request the cash value of his retirment annuity contract, subject to tax. This applies irrespective of the value of the investment. Such payment is, however, subject to the requirement that the member's emigration is recognised by the South African Reserve Bank.

What are the duties of the Board of Trustees when a member of a retirement annuity fund dies?

In terms of Section 37C of the Pension Funds Act 24 of 1956 (as amended) and the Rules of Retirement Annuities one of the important duties of the Board of Trustees of the Fund is the distribution of death benefits upon the death of a member. In terms of the above the Trustees are required to: Identify and trace dependants and nominated beneficiaries of the deceased member of the Fund; Establish and investigate each dependant and nominee’s circumstances; and Allocate death benefits on a fair and equitable basis at the sole discretion of the Trustees.

Who qualifies for consideration for benefits by the trustees when a member dies?

Dependants are defined according to specific criteria in the Pension Funds Act 24 of 1956 (as amended) and may either be legal or factual dependants, including: The surviving spouse of the deceased member; All of the deceased member’s minor and major children (whether they are biological, legally adopted or born out of wedlock); Anyone proven to be factually dependent on the deceased for maintenance; and Anyone, to whom the deceased member was legally liable for maintenance or would have become legally liable for maintenance, had the member not died.

Should I update the beneficiary nomination on my Retirement Annuity?

Where there are dependants at date of death, nominees can only be considered for participation in benefits if they were nominated on or after 30 June 1989. Due to a change in legislation on 30 June 1989, earlier nominations can only be considered if no dependants exist at date of death. A beneficiary nomination is an indication of the member’s wishes, and it must be noted that such nomination will not be binding on the Trustees of the Fund. Unlike a life policy, the nominee does not obtain a right to receive the death benefits (or part thereof) in terms of the nomination. Nominated beneficiaries who were nominated on or after 30 June 1989, will be considered along with other qualifying dependants. The general purpose of a retirement annuity is to provide for the member’s dependants in the event of the member’s death. As members’ circumstances may change from time to time, it is of the utmost importance to nominate a beneficiary(ies) and to keep any nomination up to date.

Can I nominate my estate as beneficiary on my Retirement Annuity?

Please note that your estate cannot be nominated as a beneficiary on a retirement annuity. It should also be noted that the death benefits of a retirement annuity do not form part of the assets of a deceased member’s estate and can thus not be bequeathed by will, nor can it be ceded.

Can I nominate a trust or charitable organisation as beneficiary on my Retirement Annuity?

A trust, a company or charitable organisation may not be nominated to receive the benefit, as the Trustees of the Fund are obliged to determine and confer benefits upon dependants in terms of the Pension Funds Act 24 of 1956 (as amended). These entities do not qualify as dependants.

What is Regulation 28 that my retirement annuity funds must comply to?

The Retirement Annuity Funds is governed by the Pension Funds Act. Regulation 28 requires that all new retirement contracts meet the requirements. Regulation 28 aims to protect you. It therefore limits the maximum allowed for each asset class to make sure that your contributions are invested wisely. Amongst other stipulations, Regulation 28 prescribes the maximum exposure that retirement fund investments may have to various asset classes, as follows: - 75% in equities - 25% in property - 25% in offshore assets.
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