A retirement annuity (‘RA’) is a retirement fund which is governed in terms of the Pension Funds Act. It is a tax-effective investment vehicle designed for individual investors. Ras are also tax efficient vehicles, as contributions are tax deductible, in that you can qualify for a tax refund on contributions up to 27.5%, but not more than R350 000. In addition, returns on RA investments are not subject to tax on interest, dividends, or capital gains.
Despite the tax advantages, it must be appreciated that the objective of an RA is retirement provision and ensuring that you either save towards your retirement, or supplement any existing retirement planning initiatives you may already have.
It is therefore a long term commitment, where you can then only access the funds at the earliest aged 55. Once you turn 55, there is a further restriction in that you can only access one-third of your RA savings as a lump sum.
Retirement fund lump sum benefits will be subject to tax, should the lumpsum exceed R550 000 from 1 March 2023 onwards, visit www.sars.gov.za to see the retirement fund lump sum tax table for the taxation of retirement lumpsum benefits. The remainder of the funds are required in
accordance with prevailing legislation to purchase an annuity, either a living annuity or guaranteed life annuity to provide you with an annuity income for life.
Prior to age 55, withdrawals from RAs are not allowed unless the total invested amount, i.e., your contribution to a specific retirement fund, is less than R15 000. Withdrawals will be subject to withdrawal lump sum tax, visit www.sars.gov.za to see the withdrawal tax table for the taxation of withdrawal lumpsum benefits. The only other exceptions are If you should become permanently disabled or are a non-resident for South African tax purposes for a period of three years in a row, which will then allow you to access the funds in your RA.
Case Study: H v M
During March 2017 the complainant, who was 50 years old at the time, provided the respondent’s representative with permission to review her investment, retirement, and insurance portfolio. The complainant was then informed that there was a retirement annuity with Sanlam that was around R103 000 that would appear to have been paid up and that was just lying there.
The respondent’s representative convinced the complainant to reinvest the funds with the respondent, and it was agreed that the funds would be reinvested for a period of 5 years. A Section 14 transfer was applied for and the funds were placed into a retirement annuity with the respondent.
Five years later during 2022, the complainant approached the respondent to withdraw the funds and she was informed that the policy had been implemented for a period of 15 years and that should she withdraw the funds prior to the maturity date she would incur penalties in the region of R47 000. The complainant was upset with this news, as she had specifically requested that the funds be invested for a period of 5 years, and she approached this Office for assistance.
This Office noted that the complainant had been 50 years old when the transaction concluded, and that the earliest the complainant could access her funds within the retirement annuity as age 55. The term of 15 years therefore raised a concern as not only had the complainant alleged that she had requested a 5 year term, but because a 15 year term would not appear to have been in the complainant’s best interests, as it restricted the options available to her at age 55 and would as detailed by the complainant have led to penalties should the policy have been terminated.
In addition, this Office wanted the respondent to provide documentation showing compliance with Section 8(1)(a-c) of the General Code of Conduct for Authorised Financial Services Providers and Representatives (‘the Code’) where the respondent needed to support why a term of 15 years was appropriate to the complainants needs and circumstances.
The respondent was also requested to provide details of the complainant having been advised of the consequences and implications of the 15 year term and the effects on the policy for early termination in compliance with Section 7(1)(c)(vii) of the Code to have allowed the complainant the opportunity to make an informed decision.
Upon receipt of this Offices correspondence the respondent undertook to resolve the matter, with the complainant. Whilst the exact details of the resolution were not made available the respondent confirmed that when the Section 14 transfer between the insurers was completed, an amount of R 107 718.29 was invested into the RA. The amount invested had subsequently
increased to R 138 279.06 and that this is the amount that was paid to the complainant, without penalties. It was confirmed with the complainant that she had accepted the offer in full and final resolution.
Lessons Learned:
- When presented with a recommendation in respect of a retirement annuity policy, always check whether the maturity date exceeds the age of 55 years. Age 55 is the earliest one can access the benefits of a retirement annuity and any maturity date that exceeds this may be to your detriment.
- Upon reaching the age of 55 you will, based on your circumstances at that time, be able to decide whether you wish to access the funds, i.e., the 1/3rd available to you and place the remaining 2/3rd into an annuity, or you can choose to extend the term for a further year and continue to do so until the funds are required to fund your retirement.
- By not having a maturity date more than age 55, you will maintain control over your retirement benefit, and reduce the effects of commissions, fees, and charges on your retirement benefit.
