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Retirement Annuities 101



Ensuring that you are in a good financial position when you decide to retire one day should be a top financial planning priority from the day you start earning an income. There are a number of vehicles in which to invest your retirement savings. 

Many people will have a pension or provident fund as part of the employee benefits offered by their employer. For individuals or the self-employed, a retirement annuity (RA) is a tax effective retirement investment vehicle for those who do not have a pension or provident fund provided by an employer. In addition, many people who have pension or provident funds supplement their retirement savings with an additional RA to ensure they have enough for retirement.  

“An RA is a voluntary pension plan that an individual can belong to if the person complies with the minimum requirements, which normally constitutes a signed agreement to implement the RA, acceptance of the agreement by the service provider and payment of contributions either on a recurring or once off basis. RAs are normally offered by large financial institutions such as life assurance companies and certain investment companies and the funds within an RA are locked in until the member reaches the age of 55,” explains Johan Botha from Aon South Africa’s Employee Benefits division.

An RA differs from other retirement products in that an employer/employee relationship is not required, as is the case with pension funds and provident funds.  “Membership to a pension or provident fund normally ceases when your employment is terminated for whatever reason and the funds (member credit) contained within these could be transferred into an option such as an RA to ensure that you preserve or safeguard your retirement income. There are also other alternatives as well, such as preservation funds or leaving the money in the fund the member is exiting from,” Johan adds.

“The purpose of a retirement annuity is to provide a monthly income once you reach retirement age.  You have the option of taking one third of the benefit amount in cash with the remainder of the funds being reinvested to provide a monthly pay-out or annuity; or you can reinvest the full benefit amount from which to draw a monthly income,” says Johan.

What happens to my RA when I die?

While still alive, the RA member will be the sole beneficiary of its benefits.  “However, if you were to pass away before accessing your RA benefits, then the total fund value becomes payable as a death benefit, of which, under current legislation, the first R500 000 is tax-free with the balance of the funds taxed according to a sliding scale.  If you are already drawing a monthly sum the availability of any value to be paid to beneficiaries will exclusively be dependent on the type of annuity or pension that was purchased.

“According to the Income Tax Act of 1962, an RA is excluded from a person’s estate at the death of the member, which is why the nomination of a beneficiary on your retirement annuity is vital.  The process of allocating benefits will be driven by Section 37C of the Pension Funds Act, which in most cases means that the benefits will be paid out to your appointed beneficiaries and financial dependants in compliance with the act, without attracting any estate duty or executors’ fees,” says Johan.

According to Section 37C of the Pension Funds Act, there are three types of beneficiaries that may exist on an RA:

  • Legal dependants – would include spouses, fiancées, children (born and to be born) or parents.
  • De facto dependants – based on the facts of the situation this could be brothers or sisters, their children or a third party that the member is supporting financially.
  • Nominees – a person you would like to nominate as beneficiary but who is not necessarily a dependant.

The Trustees of a retirement annuity fund will then be tasked with:

Step 1: Identifying all these parties.   

Step 2: Determining whether or not they are/were truly dependant on the deceased on date of allocation of the benefit or would have become dependent had the deceased not passed away.

Step 3: Making an equitable allocation of the money that is available. In this process you will normally find that trustees would also consider other allocations such as the terms of a will or other assurance. Minor children could receive more than major children; some dependants might be excluded due to the greater need of others based on the amount that is available for distribution for example.

It is very important to consider who you support financially and who relies on you for their livelihood and daily living costs when you complete your RA nomination form. 

What happens when children are involved?

There are numerous important aspects to consider when children and especially minor children are involved.  “Children normally receive their allocations in cash when they reach the age of 18 unless otherwise specified by the beneficiary.  If a minor child is allocated a benefit from an RA, the biological parent (if still alive) will receive the benefit on behalf of the minor unless the parent is found to be unfit to manage the money on behalf of the minor or where the parent instructs that the money be invested in a vehicle such as a trust or beneficiary fund. If any other party is involved other than the parent, the money will normally be invested in a beneficiary fund and the legal guardian will receive an allowance,” Johan explains.

“It is highly advisable to discuss your retirement plans with a professional advisor who will be able to provide you with guidance on the regulatory and tax implications that could have an enormous impact on what you finally end up with when you retire one day.  Consulting with an expert in retirement planning who can provide you with knowledge, expertise and impartial professional advice is one of the best decisions you can make in planning for a financially secure retirement,” concludes Johan.