You have many options to consider to ensure your savings work best for you in retirement. This is especially relevant when considering the impact that the current global uncertainty may have had on your retirement investments. Ultimately, the best-suited retirement income solutions are dependent on your specific retirement needs. And each of these solutions has a tax implication.
A compulsory purchase annuity is an annuity that must legally be bought with at least two-thirds of the benefits received from a retirement fund or retirement annuity. The entire annuity payment is subject to income tax, because no tax has been deducted on the retirement savings.
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For discretionary savings, a voluntary purchase annuity can serve as a highly tax-efficient way to provide regular income in retirement that is guaranteed for life and never decreases. Unlike a compulsory purchase annuity, it can be purchased voluntarily from either the remaining one-third lump sum, or from discretionary savings like the proceeds from the sale of a house, for example.
A voluntary purchase annuity may be a tax-efficient choice, as the income derived is only partially taxable. In a voluntary purchase annuity, the annuity payment consists of a capital portion and an interest portion. The capital portion does not form part of the taxable portion of the annuity payment. Only the interest portion is taxable.
Just SA says that although voluntary purchase annuities have been around a long time, they generally tend to be overlooked as a tax-efficient income solution. It can be particularly attractive for a retired person downsizing their property and releasing discretionary savings because the proceeds can be converted into guaranteed income for life with a higher, tax efficient income yield than traditional savings vehicles.
A number of options are available for voluntary purchase annuities. For example, you can choose to receive the same income for a period of time or for the rest of your life (known as a level annuity) or link such income to increase with inflation or a set annual increase percentage of your choice. You can also provide for your spouse or purchase a minimum payment guarantee to provide for loved ones in the event of your early death.
It is also available as a with-profit annuity, where guaranteed income can never decrease, even in adverse conditions, and annual increases are linked to the smoothed investment return of a balanced fund managed by some of South Africa’s prestigious asset managers.
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Just SA is a retirement income specialist
Just offers a range of lifetime income solutions (life annuities) that provide retirees with financial certainty and protection from outliving their assets. Partnering with best-of-breed asset managers and administrators, Just provides an enhanced value proposition to meet the different needs of South African retirees.
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