Retirement Annuity season? Look offshore instead

It’s March again, and in tax terms, that means only one thing: it’s a new RA (retirement annuity) season, where taxpayers look at the forthcoming year to fund their RAs. All in the hope to maximise their tax benefits before the end of the tax year come 28th February 2022.

But while there are clear benefits in using RAs for retirement and taxation planning, or contributing to a tax-free savings account, there are far more flexible and beneficial options available to those who are prepared to look beyond South Africa’s borders, says Tim Mertens, Chairman of Sovereign Trust SA.

The benefits of RAs are well-known: taxpayers can invest up to 27.5% of their annual taxable income, to a maximum of R350 000 per year, and obtain deductible tax benefits. Investment returns on RAs are generally not subject to income tax or capital gains tax (CGT), and do not form part of taxpayers’ estates for estate duty purposes.

But RAs are also limited in many respects. In retirement, only one-third of the accumulated pot can be withdrawn in cash (tax-free up to ZAR500 000), with the balance having to be invested in an annuity to provide an income. An even bigger disadvantage can be the prescribed investment limitations contained in regulation 28 under the Pension Funds Act, which restrict the exposure one can have to overseas (offshore) investments – currently to 30%.

“Our message to people considering topping up their RA is that there are potentially better offshore options out there, such as using their annual discretionary allowance to set up an international retirement plan (IRP),” said Mertens. “IRPs are excellent alternatives for those wanting to invest beyond traditional onshore retirement plans, and have some key benefits that simply cannot be ignored.”

The SA Revenue Service and the Reserve Bank allow South African investors to invest up to ZAR11 million per taxpayer per year, as a combination of their annual Foreign Investment Allowance (FIA) and annual Discretionary Allowance. This far exceeds the tax-free investment limits contained in an RA and tax-free savings account.

These allowances have already been taxed, so there is no further tax deduction allowed when investing into an IRP – but the ongoing advantages of the IRP far outweigh those of onshore retirement products, says Sovereign Trust consultant Leah Mannie. These can be summarised as follows:

  • No ‘Regulation 28’ – IRPs can invest in literally thousands of global funds. There are no prescribed limits to the equity exposure, nor are you constrained by the geographic location of the investments. Additionally, the IRP is typically based in hard currency (such as the GBP, USD or Euro) as opposed to the Rand, which can be highly volatile;
  • Earlier retirement age – The retirement age with an IRP can be anywhere between 50 and 75. In retirement, the IRP member can elect to collapse the plan, partly retire, or draw down ad-hoc amounts to suit their specific needs. This provides incredible flexibility and planning options. There are also no limits around the amount of cash that can be withdrawn, nor is there any requirement to purchase an annuity. This means that retirement funds can remain in equity investments even when the member is in drawdown.
  • Full portability – If a taxpayer emigrates, the IRP is completely portable, whereas South African RAs or pension funds are not. “As of 1 March 2021, individuals who financially emigrate will need to prove that they have been non-tax resident in South Africa for three full years before they are able to move their SA pensions or Retirement Annuities out of the Republic. With an IRP, there is no lock-in period to consider,” said Mannie.
  • Benefits in retirement – A member of an IRP is able to elect a distribution of benefit from the contributed capital element of the plan. Any drawdown of the capital amount (the funding from previous discretionary allowances) can be distributed back to the South African member free of tax. It is only when the member draws down from the capital gains account that a distribution becomes subject to the SA capital gains tax regime. The ability to segment your IRP in this way provides increased flexibility and the opportunity to delay a tax event.

Any South African who is interested in diversifying their retirement planning into the international space is encouraged to look at the wider offering, consult their financial advisor or ask for more information.

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