This time of year, many investors are in a rush to contribute as much as possible towards their retirement annuities before the end of the financial year, and rightfully so.

Along with the most obvious tax advantages associated with a retirement annuity (RA), investing in a retirement annuity also offers an array of other benefits:

Tax-efficient

With new legislation which became active on 1 March 2016, we saw an increase in the percentage of your allowable tax-deductible contribution (personal income tax) from 15% to 27.5% of your taxable income or remuneration, whichever is the greater, up to an annual limit of R350 000.

Excess contributions in one year can also be carried over and deducted in the next year. Even if you are a member of a company pension or provident scheme, you can set up a retirement annuity to supplement your existing contributions, which are tax deductible. This means that if you have an existing provident fund at your current employer to which you contribute 15%, you can now enjoy an additional 12.5 percentage points as an allowable tax deduction in an RA.

Furthermore, an RA is exempt from tax on dividends and interest, and you won’t have to pay capital gains tax on the growth earned on your investment

Don’t run the risk of investing too much and not having an emergency fund available when you really need it.

It teaches us discipline

Many may disagree that this is an actual advantage, but the fact remains that South Africans are simply not doing enough to ensure a comfortable retirement.

Unless you are emigrating or qualify for early retirement due to ill health, you will not be able to touch the money in your RA prior to retirement.

For those who are less disciplined and often succumb to the temptation of withdrawing from their investments to fund impulsive purchases, an RA is the ideal investment vehicle. But be sure to stick to what you can afford, always taking into consideration life’s little surprises.

Don’t run the risk of investing too much and not having an emergency fund available when you really need it.

You will have yourself to thank for a comfortable retirement

The reality many South Africans are facing is having to retire and survive on only the current government pension grant.

I have touched on this subject so many times before, but I will say it again: if you can live comfortably off a maximum grant of R1 600 (or R1 620 if you are older than 75 years) per month, you obviously have nothing to worry about and you don’t even have to read any further.

But I doubt whether anyone will be able to live comfortably off so little money, and it is for exactly that reason that you need to save as much as you can towards retirement while you still have time.

Cutting back on luxuries may not be much fun, but you will be extremely thankful if you are able to someday retire and still be able to, at the very least, maintain your current lifestyle.

The important thing to remember is that a contribution made to a retirement annuity is still your money, even if you can’t spend it immediately.

Your RA benefit is not subject to estate duty

In the unfortunate event of your death prior to retirement, your RA benefit will not be subject to estate duty.

Always ensure that you list all your dependents and/or beneficiaries on your retirement investment application, or that you contact your adviser for the necessary requirements to have them listed, if you didn’t do so on your original application form.

How much should I save?

A well-researched rule of thumb is that a retirement income of 75% of your final salary just before you retire, will allow you to live comfortably during your retirement years. You may be questioning what’s in it for you?
Especially as saving more means less disposable income today. The important thing to remember is that a contribution made to a retirement annuity is still your money, even if you can’t spend it immediately.

You may think that you do not need to save a lot of money now in order to achieve this goal, as retirement is so far away. However, assuming a reasonable rate of return, a 30-year old who has not yet started saving for retirement, needs to save about 22% of their salary to retire comfortably. This percentage increases to 30% for a 35-year old starting to save. It is never too late to start saving for retirement.

Other things to consider –

you can still make a contribution before 28 February to qualify for the associated tax benefit

Not everyone can afford to save 27.5% of their income towards retirement, but the more you save, the better your position will be in retirement.

Like most countries, South Africa has a progressive personal tax regime. Our tax rates put a heavier tax burden on those who should be able to afford it best, those who earn the highest salaries. If you are lucky enough to be earning a salary above the highest tax bracket, you will save 45% in tax on an extra rand saved in a retirement fund, whether it be in the current tax year or at some point in future.

For those who already have an RA in place, make sure that you contribute as much as possible before the financial year-end to reap the tax rewards associated with it.

For those who haven’t yet started saving towards your retirement, the best time to start is now. If you act quickly, you can still make a contribution before 28 February to qualify for the associated tax benefit later this year.