Job opportunities have widened considerably and to a large extent disrupted the way we work. This has also largely been exasperated by the pandemic which has accelerated the need to be relevant in a very disruptive era.
Starting or changing jobs is appealing but financial experts are urging individuals to continue managing their finances during the process. One area that needs added attention is your retirement savings.
A Retirement Annuity (RA) is a regulated retirement savings product. It is used by people who are saving for retirement. At retirement, you can use the accumulated contributions to purchase retirement income either through a living annuity or a guaranteed life annuity.
“Your retirement savings is crucial as it offers that safety net when you retire,” says Samukelo Zwane, Head of Product at FNB Wealth and Investments. “When changing employers, it’s important to avoid withdrawing your retirement savings. Your aim is to preserve your retirement savings by transferring them to a retirement annuity where you can continue making contributions or transfer it into a preservation fund where you will not have an option of continuing with contributions.”
He highlights that we should always ask ourselves the following questions before tapping into our RA’s.
How does an RA work?
You are allowed to make regular contributions in a retirement annuity. The contributions you make into a retirement annuity are tax deductible (the state refunds you the tax on the contributions) up to 27.5% but not more than Maximum R350 000.
Returns on investments in a retirement annuity are not subject to tax on interest, dividends, or capital gains. Unlike a pension fund, savings in a retirement annuity are not linked to your employer. When you move from one employer to another, you can continue contributing to a retirement annuity.
How can I benefit from an RA?
Contributions into a retirement annuity has many benefits. They are tax deductible up to 27.5% not more than R350 000. This means that any tax that you have paid on the contributions will be refunded back to you. The returns on investments in a living annuity are not taxed.
The amount that would have been taxed is reinvested into your living annuity resulting in bigger savings. Retirement annuity savings are protected from creditors, in the event that you go insolvent your creditors can not claim against your living annuity. It is independent from your employer allowing you to continue contributing to the product even if you leave your employer.
What RA options do I have once I’ve resigned from my job?
Deciding which option is best for you is important. The beauty about a RA is that it is independent from your employer. When you resign from your employer you can still continue making contribution into your living annuity.
If you were contributing to an employer pension fund you have an option of transferring your saving into a retirement annuity when you change jobs; it could be an existing or new retirement annuity. Important to note that preserving your pension or transferring it into a retirement annuity will help you to achieve your retirement goal.
Are there any rules/laws that I need to follow if I want to withdraw my RA funds?
Firstly, it’s important to note that withdrawals from a RA is not allowed unless the total invested amount is less than R15 000. In which case you will be allowed to complete a RA withdrawal form to access any of your retirement annuity savings.
If you become permanently disabled or are a non-resident for South African tax purposes for a consecutive 3-year period, you can get access to your retirement annuity savings.
Once you get to age 55, you can access 1/3rd of your RA savings as a lump sum. You are required to use 2/3rd of your savings to purchase retirement income either through a living annuity or guaranteed life annuity
Can I look to change my RA to a different plan, such as a provident fund?
You can transfer your RA into another retirement annuity. However, you can transfer from pension fund, provident fund and preservation fund into a retirement annuity.
“About 90% of people retiring are not retiring comfortably, the main reason for people not retiring comfortably is because they are using up their pension when they change jobs. If you have cashflow challenges when changing jobs you must try to use other sources of money instead of using your retirement savings. Your retirement savings is crucial and will enable you to retire comfortably in your golden years,” concludes Zwane.