One of the biggest benefits of a retirement annuity is the tax breaks and deductions. Investing in a retirement annuity policy means:
The power of compound growth
- You can deduct your contributions from your income tax due at the end of the year (up to a certain limit).
- There is no tax on interest or capital gains on your investment.
- Although you pay tax on the income you receive once you have retired, your tax rate is normally lower when you retire than it was when you were working. Up to R500 000 you receive as a lump sum at retirement will be tax free. The tax charged on your annuity you receive is determined using normal tax tables.
- When you retire and convert the retirement annuity to a living annuity, you will not pay tax on growth within the living annuity. On compulsory annuity, you pay tax on the full annuity as determined according to normal tax tables. If it is a voluntary annuity you only pay tax on the growth.
- In retirement, you only pay tax on the portion you draw as income each year.
Because you are investing over a long period, your invested funds start to work for you from the day you invest. The benefit of compound interest means that you earn growth on the growth − so the longer you invest, the bigger the advantage. Over 30 years, more than 65% of the value of your retirement annuity could come from this compound growth alone.
Not being able to access your retirement savings is a good thing. It removes the temptation of spending the money you set aside specifically for retirement on things that may be short-term distractions.
Supporting your dependents
Your retirement annuity can provide for those you leave behind should you pass away. The cash benefit is not part of your estate, therefore creditors won’t access your hard-earned retirement funds.
You are able to ride out short-term fluctuations in the market in the pursuit of long-term real growth, which pays off ultimately when you retire.