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It happens to us all. A financial crunch hits, and we start thinking about the funds we’ve squirreled away in our retirement annuities. Being able to cash in your retirement annuity might help you out of a pickle today but would leave you in even more of a pickle in the future. How will you retire if you’ve spent all your retirement savings on an unexpected emergency? It is for this reason, and because of the significant tax benefits that come from saving through retirement annuities, that you are not permitted to withdraw from this investment before the age of 55. What are the rules around retirement annuities? When and how can you cash in your retirement annuity? Is it at all possible to withdraw your funds early? Let’s take a look at these questions.

My Retirement Annuity

Why are you not allowed to withdraw money from your RA?

Long story short – the tax benefits you get from government  is an incentive for saving for your own retirement., You are not permitted to withdraw your RA funds early to make provision for your old-age thereby reducing the government’s responsibility to provide you with a pension. However, when you reach the age of 55 you will have the option to take one-third as a cash payout, while you will need to use the remainder to purchase an annuity that will fund your retirement by paying out a regular pension income.

What are the rules around retirement annuities?

RAs are approved retirement funds regulated by the Pensions Funds Act and these rules state that investors are not permitted to access the funds held in this type of investment structure (with a few limited exceptions) before the age of 55.

Regrettably, many investors are not aware of this fact when setting up their RAs, only to discover later on that their funds are not accessible before age 55. Understandably, this might seem unfair at first, but it is important to understand the reason for this rule.

It’s a trade off: significant tax benefit but you can’t touch your money until 55

To provide incentive for South Africans to save for their retirement, government provides a number of tax benefits for retirement fund investors.

  • You can invest up to 27.5% of their taxable income towards a retirement annuity on a tax-deductible basis, up to a maximum of R350 000 per year, which is a significant benefit.

For example, if your taxable income for the year is R400 000 and you invest R100 000 of it into your RA, your taxable income drops to R300 000, which means you’re taxed only on the lower amount. In other words, RAs have an immediate tax benefit in that you pay less tax while you’re saving.

  • If being able to invest with tax-free money wasn’t enough, RAs are also exempt from tax on dividends and interest, and no capital gains tax is payable on the growth earned in the investment.

Everything in life comes at a price. In exchange for these tax concessions, the government has legislation in place to ensure that the funds are used only for the purpose intended –  to fund your retirement.

Once you’ve reached 55 you become eligible to retire from your RA. At this point you will have the option to take up to one-third of your savings as cash and use the remaining two-thirds to purchase an annuity income. Without these rules, RA holders might be tempted to use their funds for other purposes, which could negatively impact their retirement preparedness.

Is it possible to access your RA funds before the age of 55?

Every rule has exceptions. Before March 1, 2021 individuals could not access their RA funds unless they were 55 or older, their fund value was below R7 000, they became physically disabled, or completed formal emigration through the South African Reserve Bank (SARB) process.

Retirement annuity withdrawal rules now state that anyone who wishes to access their retirement annuity may only do so if they have reached 55 years of age, the fund value is less than R15 000, they become permanently disabled or they have been a non-resident for tax purposes in SA for a period of three consecutive years on or after March 1, 2021. This means that if you were already a non-resident for tax purposes from March 1, 2018, to March 1, 2021, you are now eligible to withdraw your retirement annuity early, as a lump sum.

If you become a non-resident after or too close to the age of 55, your options are limited.

  • If the value of your RA is below R247 500, you can access the full amount, after tax. 
  • If the value is above R247 500 then the one-third/two-thirds principle applies, and you can only take one-third as cash while using the remainder to purchase an annuity. This pension income will pay out in SA, and you will need to transfer it abroad regularly.

FinGlobal: retirement annuity encashment specialists

Need a little assistance understanding your options and making your money moves? That’s where FinGlobal comes in. From start to finish, we can handle your Retirement Annuity withdrawal and move your funds safely out of South Africa.

Leave us your contact details and we’ll be in touch to see how we can make the financial transition as smooth as possible.