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A question we often get asked is this:

“Can I take out a retirement annuity if I already belong to a pension or provident fund?”

The reason I’m bringing this up is because I’ve just read an oldish brochure from Discovery Invest.

Here’s some interesting stuff you might not know:

  • In 2011, South Africa had a population of 52 million people
  • Of those, only 13 million were registered taxpayers
  • Of those, only 4,5 million submitted tax returns in 2011
  • Of those, only 1, 9 million claimed deductions for their pension fund contributions, and
  • Only 1, 2 million claimed deductions for retirement annuity contributions

Let’s look at the maths of that, shall we?

  • 4, 500, 000 submitted tax returns less 1, 200, 000 RA deductions = 3, 300, 000 people claiming nothing.
  • The minimum tax deduction you can expect to get back from SARS is R1, 750 in any one year
  • 3, 300, 000 x R1, 750 = R5, 775, 000, 000 in unclaimed tax deductible income!

And here I was crying over Nkandla.

Obviously retirement is not as big a problem as we’re told, right?

I mean, if so few people are taking advantage of the massive tax breaks, then retirement can’t be such a huge problem. But then I spotted this neat Discovery Invest chart in their brochure.

Click on the image to enlarge:

Savings Required for Retirement

This is what the chart is showing us.

Let’s say you want to retire on R20, 000 a month.
A 20 year old would need to save R2, 436 a month while a 50 year old needs to save R14, 085 a month. Both of them will get to the same place.

So here’s why I think a retirement annuity makes perfect sense

Imagine you’re contributing R1, 750 a year towards a retirement annuity.
Now it doesn’t matter whether you belong to a pension or a provident fund. The minimum deduction you’re going to be able to claim is R1, 750 for the year (or R145 a month).

So how does this measure up for persons with different marginal tax rates?

  • Someone with an 18% tax rate gets back R315
  • 26% tax – R455
  • 31% tax – R542
  • 36% tax – R630
  • 39% tax – R682
  • 41% tax – R717

Now watch how this works for people with a high tax rate versus someone with a low tax rate.

Take for instance the guy who pays tax at 18%.
He gets back R315 of the R1, 750 he invests. His actual cost is R1, 435 for the year (or R119 a month).

And what about the lady who pays tax at 41%?
She gets back R717 of the R1, 750. Her actual cost is R1, 033 (or R86 a month).

Can you see why the retirement annuity makes sense?

What about the guy who’s 50 and wants R20, 000 a month?

We can see he needs to invest R14, 085 a month towards retirement. Let’s assume that the full R14, 085 is deductible as his retirement annuity contribution, and that he pays tax at the 41% marginal tax rate.

First thing he tells me is that he doesn’t have the R14, 085 to invest. All he can afford to invest is R10, 000 a month (A real tightwad!).
I whip out my trusty calculator and work out that if he invested the R14, 085 it works out as follows:

  • R14, 085 invested, of which
  • R5, 774 is paid by the taxman, and
  • R8, 311 is paid by him.

Here’s a guy with his back against the wall. Right now he can afford R10, 000 a month – and since it’s only going to cost him R8, 311 a month – he tells me to increase his retirement annuity contribution. I walk away with a R16, 500 a month investment, and he walks away with a happy retirement.

Here’s the problem you might have.

The company where we invest our client’s funds has a minimum monthly contribution of R500.

But I also realise that maybe all you want to do is dip your feet. Maybe all you want to invest is the bare minimum of R145 a month.
So what do you do? Who’s willing to help the small investor? Well there are a few companies willing to offer you a retirement annuity at just that price.

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Until next time.

The InsuranceFundi Team


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