Question:
Is it advisable to have an RA and a pension fund at the same time? What are the tax implications?

Answer:
Well done for taking retirement savings seriously!!! When addressing the issue of retirement savings there is no one size-fits all answer to suit everyone. It is therefore important to consult with a Certified Financial Planner to have a holistic financial plan put together. This plan will take all your current and future goals into account and will consider your lifestyle aspirations for both now and during retirement. Only once a planner fully understands all of you needs, will he be able to look at the most appropriate investment decisions to meet your needs.

Having said that, only a small percentage of South Africans (around six percent) are able to retire with sufficient provision in place to meet their retirement needs. Therefore, any saving that is made towards retirement will stand you in good stead in the future.

Contribution rates

Where an employer has a pension or provident fund in place for employees, it is a requirement that all new employees be members of such a fund. Contribution rates are specified in the rules of the fund and in the case of a pension fund; you will usually find both employer and employee contributing. Contribution rates are based on a percentage of the employee?s pensionable salary.

Although saving in a pension of provident fund is certainly a good starting point, retirement benefits from such a fund alone may generally not be enough to meet all your needs in retirement. It may therefore be appropriate to supplement your retirement savings with additional investment contributions. For many people, a retirement annuity may be the most appropriate investment vehicle to use for such contributions.

To ensure that the RA benefit is used for retirement, specifically legislated rules apply to ensure that the benefit is not accessed unnecessarily before retirement. Investment growth within a retirement fund (pension, provident and retirement annuity funds) is not taxable at all. This favourable tax dispensation serves to enhance the retirement value of the investment.

Income Tax Act

The Income Tax Act further contains provisions which aim to incentivise taxpayers to save in pension and/or retirement annuity funds. Contributions to both pension and retirement annuity funds made by a taxpayer during a tax-year may be allowed as a deduction against income earned. The deductible portions of such contributions are limited though and different limitations apply to pension fund and retirement annuity contributions.

Another point to note is that from a cost perspective, it is generally cheaper to save in a pension or provident fund than in a retirement annuity fund.

As mentioned in the beginning, I would strongly urge you to consult with a qualified financial planner who will be able to assist you in putting together a plan designed around your personal needs and goals. A very important aspect is of course the affordability of contributions to both retirement funds and a thorough budgeting exercise would assist in balancing your obligations with your needs.

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