Questions to ask before purchasing a Retirement Annuity

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Ever wondered what you can and can’t do with your retirement annuity?

Here are some humdinger questions I’ve been asked in the past:

  • Can’t I just pay the tax and take the full amount in cash?
  • Can I retire at a later date?
  • I got a letter saying my retirement annuity has matured. Should I ignore it?
  • Am I allowed to move my pension to another company?
  • Must I take the one-third in cash?
  • Can I take the one-third in cash and leave the rest until I really need it?
  • What if my retirement annuity is only worth R10, 000? Surely that’s not going to be enough to buy a pension income?

I think I might have missed one or two good questions, but there’s enough there for a great article so let’s jump straight in, shall we?

Can’t I just pay the tax and take the full amount in cash?

No way, Jose! The rules say:

  1. You cannot retire before age 55 (unless it’s caused by disability), and
  2. you can’t take more than one-third in cash.

Of the one-third (remember I’m writing this in July 2015):

  • R500, 000 is payable tax-free.
  • Any amounts which exceed this R500, 000 but which don’t exceed R700, 000, are taxed at 18%.
  • Any amounts exceeding R700, 000, but which don’t exceed R1, 050, 000, are taxed at 27%, and
  • Amounts exceeding R1, 050, 000 are taxed at 36%

In other words, if you withdraw R1, 050, 000 as your one-third then you will pay R130, 500 in tax.

By the way, these same rules apply if you were to die instead of retire (Amazing how the two rhyme; but let’s not get morbid here). Your beneficiaries are entitled to take the full amount – not only the one-third – subject to these same tax rules.

Can I retire at a later date?

Of course you can. In fact, you need not retire at all. In the good old days you had to retire from your retirement annuity by age 70. Now you can leave it as an inheritance to the grand-kids if you wish.

Just because the contract says it ends when you turn 65, doesn’t mean you must retire.

Should I ignore the maturity letter from the life insurance company?

No, never. Here’s why:

What the life insurance companies do is move your investment into their ‘deferred maturities’ portfolio. This is a grand old term for ‘cash’ which is absolutely safe. And of course you wouldn’t want them to do anything less with your money.

You wouldn’t want them leaving it in shares, sending you a letter saying its worth a million Rand, and then overnight having a stock market crash in which your investment halves, would you?

Now cash is safe while you dawdle around and decide on what you want to do in the next couple of weeks. But it isn’t safe if you decide to postpone retirement for another ten years.

Can I take my ‘pension’ somewhere else?

Yes by all means.

Firstly realise that when we say ‘pension’, we’re actually talking about an ‘annuity’. An annuity is an income which is paid to you for the rest of your life. A pension is something which you belong to as an employee at a company.

You are welcome to shop around at a number of other life insurance companies. How else will you find out which one is willing to pay you the highest income?

Did you get that? You don’t buy this from your broker because you like him or her. You buy it from the company offering you the best deal!

Of course, this all depends on whether you’re buying a conventional – otherwise known as a traditional annuity – or whether you’re buying a living annuity. With a living annuity all bets are off on guaranteed income.

Must I take one-third in cash?

Not at all. You can use the full investment to buy yourself an income. BUT…

I would recommend you at least take the full tax-free amount of the one-third allowed in cash. We’re talking about R500, 000 here. You can then take that amount and invest it in a voluntary purchase annuity (We’ll discuss the difference between a voluntary purchase and a compulsory purchase annuity in another article).

I mean think about it. If you don’t take this then you’re going to be fully taxed on the income anyway. Since you’ll be getting a higher income, you’ll pay more tax.  Many people don’t get this, but the annuity income or ‘pension’ (if you prefer calling it that), is fully taxable at retirement. Just like your salary currently is.

Can I take only the one-third and leave the rest for later?

No. Retirement isn’t something you do ‘half half’ – at least not in the taxman’s eyes.

Think of it from their perspective. You decide to only withdraw the tax -free portion of your one-third, leaving them to wait until you ‘one day’ decide to take the rest. They might have to wait twenty years to get their tax revenue out of you.

“No mate. If you want your R1 then we want our R1 as well.”

What if my RA is only worth a miserable R10, 000?

Now that’s sad news indeed, BUT…

The good news is, if your entire retirement annuity is worth less than R75, 000, then you may take the entire amount as a lump sum.

But here’s some bad news if you belong to an underwritten retirement annuity fund, and most retirement annuities offered by life insurance companies are.

Let’s say you have five itsy bitsy RA’s all worth less than R75K, and all of them with the same life insurance company.

Don’t think for a moment that you’ll get all five paid out as single lump sums. That life insurance company won’t see them as five individual policies but rather as one lump sum in the fund and which together exceed the R75k.

That’s because the retirement annuity fund owns the policies – not you. Yes, you’re a member of the fund – and you’re legally entitled to the proceeds – but you’re not the actual owner of the individual policies.

Hopefully this helped you

I think I might have missed a few great questions in this article. Nevertheless, that’s enough overwhelm for one day.

Why not leave a question or two below in our comments section and we’ll be sure to include them in a future article on retirement annuities?

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Until next time.

The InsuranceFundi Team

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