YOUR MONEY: Are SA RAs still worth it?

Question:

Are SA retirement annuities (RAs) worth it with the tax saving on the first R350k? There comes a point where the low local return very quickly negates tax savings. Should one just pay one’s tax and invest offshore?

— Johan K 

Answer:

An RA is a powerful financial product. It is loaded with excellent tax savings and can go a long way towards helping investors save for retirement. But RAs have fallen victim to high costs by some product providers, and poor local markets over the best part of a decade now. Yet they remain a potent financial product.

Understand the tax benefits

• Contributions are deductible from taxable income up to the least of these three: R350,000; taxable income prior to the deduction of donations and foreign tax; and 27.5% of the greater of the following two: remuneration and taxable income prior to the deduction of donations and foreign tax.
• Growth in the RA is tax free (no dividends, capital gains or income tax).
• No estate duty or executors’ fees are payable in the event of death.

Consider a taxpayer who earns taxable income of R1.5m a year and contributes R350,000 to an RA. Assume the RA’s performance is 4.5% a year (the average balanced fund returns over the past seven years, less fees). The taxpayer would pay R143,500 less tax, so their RA contribution would effectively be R206,500 (R350,000 minus R143,500). After a year the RA is worth R365,750 (77% up on the R206,500 effective investment contribution). If the portfolio grows at 4.5% a year for five years its value will be R436,000, which is a return of 16% a year on the R206,500 investment. If local RA returns normalise to 9% a year net of fees, the effective return increases to 21% a year because of the tax deduction.

Local vs offshore returns

Local markets have underperformed recently, but longer-term returns look different — and better. In future RA funds can invest up to 45% offshore, so the local-vs-offshore debate is losing relevance in the retirement investment space. This does not matter if the investor plans to retire offshore.

— Craig Gradidge, investment and retirement planning specialist at Gradidge Mahura Investments