“I don’t like retirement annuities. The returns are lousy.” The poor retirement annuity (RA) is blamed for poor returns, but actually gives better returns than any other retirement savings product available. Consider this: 1. What you invest in your RA is tax deductible. This means that the taxman will give you back a percentage of every contribution you make; and that percentage is the amount you pay on the highest taxed portion of your income. Thus, if your marginal tax rate is 30%, you get back 30% of your RA contributions. If you are earning R 50 000 per month, and you contribute R 1 000 per month, your investment effectively costs only R 700 per month – but you get the benefit of having R 1 000 invested for you. Obviously there are limits, which are reviewed regularly, to how much you can contribute and still have the full amount deductible – currently 15% of gross income. 2. While your money grows, the growth is completely tax free within the RA. Thus: If you invest R 1000 in an RA, and have a marginal tax rate of 30%; and if the RA grows by just 10%, you have earned R 400 on your investment: over 50%! R 1 000, minus 30% tax returned = R 700. R 1 000, plus 10% = R 1 100. A profit of R 400 on an effective investment of R 700. 3. Poor performance. There are portfolios that under-perform, but you do not have to be invested in them. The range of investment portfolios available to you within the structure of an RA is enormous, from the most conservative to the most aggressive. Your advisor should be advising you on where to place the underlying investments, and you should review them from time to time. 4. Security. Your RA cannot be attached by creditors if your business fails – unlike any other asset, it is protected, and is there for your retirement only. I see RAs as insurance against being poor when you are old. You should too, and ensure that an RA is part of your investment package. It need not be your only retirement savings vehicle, in fact, it should not. But it should form the foundation of your retirement savings. Speak to your financial advisor, and make sure that you are putting enough away for your old age.
Posted on: Tue, 12 Nov 2013 10:33:48 +0000
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