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Retirement Annuities

A Retirement Annuity is a personal pension plan which should provide you with a regular income once you have stopped working. It is subject to certain legislation which you need to address before investing into one.

For taxpayers in South Africa, a retirement annuity is still the most exciting tax-saving vehicle available. Contributions to retirement annuities are excluded from taxable income and as such are tax-free.

What are the rules I should adhere to?

Contributions are tax deductible subject to a maximum of the greater of;

  • 15% of your non-retirement funding income. Non-retirement funding income refers to that part of your taxable income that is not taken into account when calculating contributions made to a pension or provident fund by you or on your behalf by your employer. Variable income such as commission and bonuses is typically non-retirement funding; or
  • R3500 minus allowable pension fund contributions; or
  • R1750.

Therefore, if you are not contributing to a pension fund, you can contribute 15% of your taxable income to a retirement annuity, tax-free. If you receive taxable income that is not taken into account when calculating your pension contribution (such as overtime, bonuses, etc.), 15% of this income can be contributed to a retirement annuity, tax-free.

At retirement, a third of your capital in the retirement annuity can be taken as cash. Of this cash amount, the greater of R120 000 or R4500 times the years of contributory membership of a retirement annuity can be taken tax-free. This tax-free amount is a once off benefit irrespective of the number of retirement products you own.

Upon retirement at least two thirds of the capital must be invested in a pension-providing vehicle such as a living annuity or a guaranteed life annuity. No tax is payable on the transfer of money into the living annuity. The annual pension received after retirement is taxed at your marginal tax rate. Your marginal rate after retirement is typically lower than your marginal rate before retirement, resulting in a significant tax saving.

A retirement annuity allows you the flexibility to contribute on a regular basis, to interrupt contributions for a period and to stop contributions at any stage without penalties if you have invested in the correct vehicle - such as the Allan Gray Retirement Annuity. Life Assurance policies do not offer this flexibility without hefty penalties.

Advantages of a Retirement Annuity

  • Tax benefits now and at retirement.
  • Discipline - we all find excuses to raid our savings. You cannot access the funds in your RA until age 55.
  • Compounding - if you have the right investment medium the powers of compounding are enormous - as stated in the first tutorial.
  • Your creditors cannot get their hands on the funds in your RA. If you go out of business no one, and we mean no one, can get their hands on your money.

Disadvantages of a Retirement Annuity

  • Retirement Annuities mature at age 55 earliest. Age 55 is a long time away when you have a new house and have new kids.
  • You cannot access the funds in a RA until age 55 even if you or a member of your family falls desperately ill.
  • Outdated life policies attract full commission and are therefore expensive policies.

One of the most popular products to sell a graduate or matriculant about to get their first pay cheque - is a Retirement Annuity. It should not have any death or risk benefits attached to it which makes for an easy sell as there are no underwriting requirements.

You are far better off taking out a Retirement Annuity with Allan Gray than with a life assurer. The Allan Gray Retirement Annuity is a low commission unit trust based product that will ensure that you will take full advantage of the wonderful compounding effects of an effective savings plan over a long period of time. For those who have had a retirement annuity for longer than 26 years, an amount of R4 500 may be added to the tax-free amount for each additional year. It is thus extremely beneficial to start early.

Please note that no tax is payable on any growth in the Retirement Annuity throughout the term of the contract. If you have purchased the correct Retirement Annuity, the savings generated over time are enormous.

The following mistakes are common place amongst South Africans:

  • Start too late thus losing out on the enormous compounding effects of a successful retirement plan.
  • Believe erroneously that their business is their retirement plan. Unexpected events can torpedo the best laid business plans.
  • Buy property as a substitute to a well funded retirement plan. A balanced approach is advisable.
  • Do not manage their funds in their Retirement Annuities. Vigilance is the key word when you approach your chosen retirement age.

Latest News


Jaco Leuvennink Cape Town – Finance Minister Pravin Gordhan had a tough message for South Africans in Wednesday's Budget Speech in the National Assembly, with the introduction of a new tax bracket for the very rich, state debt creeping up and almost all economic indicators and fiscal numbers weaker than in last year's budget.


While South Africa is "once again at a crossroads" and "tough choices have to be made to achieve development outcomes", Gordhan nevertheless tried to stress the need for growth.

He used the word “transformation” more than 50 times in his speech, but against this background said: “Our growth challenge is intertwined with our transformation imperative.

We need to transform in order to grow, we need to grow in order to transform. Without transformation, growth will reinforce inequality; without growth, transformation will be distorted by patronage." He also indicated that fiscal consolidation will continue.

An additional R28bn will be collected in the coming financial year by means of those earning more than R1.5m per year paying 45% of that back to the taxman (the previous top rate was 41%), limited adjustment for bracket creep, a fuel levy rise of 30 cents per litre, a higher dividend withholding tax rate and the usual rise in sin taxes (excise on alcohol and tobacco).

There was relief for property buyers with the first R900 000 (previously R750 000) of the value of a transaction not liable for transfer duty. Social grants were increased by about 7% on average. While it looks like Gordhan made an effort to appease his critics, listening to him was tinged with sadness on the impression that it was his last budget after making a comeback as finance minister just more than a year ago.

The highlights of the budget are: Macro-economic outlook • Gross domestic product growth will gradually improve from 0.5% in 2016 to 1.3% in 2017 and 2.0% in 2018, supported by improved global conditions and rising consumer and business confidence. The percentages are considerably lower than last year’s estimates.

The review says though that greater availability and reliability of electricity should also support stronger growth in 2018/19. • Exports are expected to grow by 1.9% in 2017, 4.9% in 2018 and 5% in 2019, after estimated negative growth of -1.2% last year.

• After reaching 6.4% in 2016, consumer inflation is expected to decline to 5.7% in 2018.

• The current account deficit, after reaching 4% in 2016, will come down to 3.7% in 2018 and 3.8% in 2019. • Government will continue to enable investment through regulatory reforms and partnerships with independent power producers.

• Public sector infrastructure bottlenecks will be addressed through reform and capacity building. During 2017/18, government will establish a new financing facility for large infrastructure projects. Budget framework

• The budget deficit (consolidated) crept up to 3.4% for 2016/17 from the 3.2% stated in last February’s budget. This was due to less revenue collected than expected. The deficit is expected to narrow to 3.1% for 2017/18 and 2.6% in 2019/20.

• State debt is also steadily creeping up. Debt stock as a percentage of gross domestic product is expected to stabilise at 48.2% in 2020/21 (previously 46.2% in 2017/18, and before that 43.7% in 2017/18). • The main budget non-interest expenditure ceiling has been lowered by R26bn over the next two years (almost the same as the R25bn planned last year). • An additional R28bn (R18.1bn last year) of tax revenue will be raised in 2017/18. Measures to increase revenue by a proposed R15bn in 2017/18 will be outlined in the 2018 Budget. • R30bn has been reprioritised through the budget process to ensure core social expenditure is protected.

• Real growth in non-interest spending will average 1.9% over the next three years. Apart from debt-service costs, post-school education is the fastest-growing category, followed by health and social protection. Specific spending programmes over the next three years Over the next three years, government will spend:

• R490bn (R457bn last year) on social grants.

• R106bn (R93.1bn) on transfers to universities, while the National Student Financial Aid Scheme will spend R54.3bn (R41.2bn).

• R751.9bn (R707.4bn) on basic education, including R48.3bn for subsidies to schools, R42.9bn for infrastructure, and R12.7bn (R14.9bn) for learner and teacher support materials.

• R114bn (R108.3bn) for subsidised public housing.

• R94.4bn (R102bn) on water resources and bulk infrastructure.

• R189bn (R171.3bn) on transfers of the local government equitable share to provide basic services to poor households.

• R142.6bn to support affordable public transport. • R606bn on health, with R59.5bn on the HIV/Aids conditional grant. Tax proposals

• A new top marginal income tax bracket for individuals combined with partial relief for bracket creep will raise an additional R16.5bn.

• R6.8bn will be collected through a higher dividend withholding tax rate. Increases in fuel taxes and alcohol and tobacco excise duties will together increase revenue by R5.1bn.

• As soon as the necessary legislation is approved, government will implement a tax on sugary beverages. The rate will be 2.1c per gram for sugar content above 4g per 100 ml.

• A revised Carbon Tax Bill will be published for public consultation and tabling in Parliament by mid-2017.

• The first R900 000 of the value of property acquired from March 1 2017 will be taxed at zero percent. Before March 1 2017 the first R750 000 of the value of property was taxed at zero percent.

• The general fuel levy will increase by 30c/litre on April 5 2017. This will push the general fuel levy up to R3.15/litre of petrol and to R3.00/litre of diesel. The road accident levy will increase by 9c/litre of petrol and diesel on April 5 2017.

• Personal income tax will bring in R482bn, VAT R312bn, company tax R218bn, fuel levies R96.1bn and customs and excise duties R96bn in the coming year. Sin taxes rise Taxes on alcohol and tobacco are set to rise as follows: Beer 12c/340ml; Fortified wine 26c/750ml; Ciders and alcoholic fruit beverages 12c/340ml; Unfortified wine 23c/750ml; Sparkling wine 70c/750ml; Spirits 443c/750ml; Cigarettes 106c/packet of 20; Cigarette tobacco 119c/50g; Pipe tobacco 40c/25g; and Cigars 658c/23g. Social grant spending and increases Spending on social grants is set to rise from R164.9bn in 2016/17 to to R209.1bn by 2019/20, growing at an annual average of 8.2% over the medium term. The number of social grant beneficiaries is expected to reach 18.1 million by the end of 2019/20. The specific increases are:

• State old age grant from R1 505 to R 1 600 per month;

• State old age grant, over 75s from R1 525 to R1 620;

• War veterans grant from R1 525 to R 1 620;

• Disability grant from R1 505 to R 1 600;

• Foster care grant from R890 to R920 ;

• Care dependency grant from R1 505 to R1 600; and

• Child support grant from R355 to R380.

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