A reader recently asked a question on Fin24 on whether they should invest in a retirement annuity if their company was currently contributing to both their Pension and Provident Fund.
Michelle Dubois, a legal marketing specialist at Liberty weighed in, “A retirement annuity is used either by individuals who do not have a company retirement fund or by those who wish to supplement their company retirement fund.”
She went on to say that a retirement annuity was helpful if you have started saving a bit later on in life and need to boost your retirement funds.
What is a Retirement Annuity Fund?
A retirement annuity is usually utilised by self-employed people or those who do not participate in a pension or provident fund.
The benefit of contributing towards a retirement annuity is that it is a tax-free investment vehicle. This means that all money accrued thereafter is tax-free.
5 Reasons to Start a Retirement Annuity Fund
1. Preparing For Retirement
The most obvious, but still the most important reason, is to generate an income for when you are unable to work or retire.
A retirement annuity is used to build capital during your active working years in order to have enough income to be able to enjoy the same standard of living once you have retired.
2. Ensuring Sufficient and Disciplined Savings
We all say that we will set aside a small portion of our salary every month that goes straight into our savings account. But do we always do it?
A retirement annuity is designed to ensure you save a sufficient amount of money every month. So. when you retire, you are well-looked after.
You also only have access to your retirement fund at the age of 55. This removes the temptation of dipping into your savings and potentially depleting your account.
3. Did We Mention Tax-Free?
When contributing to a retirement annuity fund, you are able to invest as much as 15% of your total income. This is less any other pension fund contributions, but is all tax-free.
Investment growth is also higher over a longer period of time. All growth remains in the policy and offers a better after-tax return as opposed to other types of saving. This also means that a turbulent investment market will not affect you as much. This is due to your consistent contributions which averages out any variability.
When you retire, you are allowed access to a third of your investment as a lump sum. The remaining capital is invested in an annuity that provides you with income during your retirement. A wise move and a way to make sure you don’t blow your retirement all in one go.
4. Supporting Your Dependents
This should honestly be at the forefront of your focus, especially if you are the breadwinner of the family. A retirement annuity can help your spouse and dependents survive and keep up with expenses that could have possible been passed on to them.
5. Diversified Portfolio and Room to Grow
A retirement annuity offers different asset classes which allow you choice and flexibility. You can either invest in direct property, private equity, fund of funds or house up to 20% of your savings offshore without needing Reserve Bank clearance.
Lastly, a retirement annuity gives you the flexibility to slowly increase your contributions over time. Whereas a pension fund is a fixed portion of your monthly salary. This may come in handy when, for example, the kids leave the nest and you have a little more money to invest as a result.