Annuity Plans Your Best Retirement Option is a sentiment many Financial Advisers agree on. Sometimes financial experts have differing opinions on the best ways for people to deal with their money. The one thing that you can guarantee that they all agree on though is that saving for retirement, and not waiting too long to do so, is a must for everyone.
What the best ways to do that are, however, is an area they may disagree on. However an increasing number of experts, and retirees already reaping the benefits of their decision believe that retirement annuities are a fantastic choice.
Annuity Plans Your Best Retirement Option
What is a Retirement Annuity?
A retirement annuity – often referred to as an RA – is a type of private pension plan and an investment that is specifically tailored to help you save for retirement.
In practice retirement annuities are a kind of “wrapper”, but one that contains a number of investments in shares, property, bonds and cash.They are purchased from fund management companies and these companies assign the RA a panel of financial experts who then make investment decisions on your behalf.
There are two ways to invest regularly in an RA once you have one; you can make ad-hoc payments whenever you have extra money available to do so or – and this is the far better option – you can make regular, set contributions instead. And the fact that the earliest you can access an RA is when you reach your 55th birthday is for many a saving grace. You know, those of us who have a hard time saving in a properly disciplined manner.
But there are more advantages to using a retirement annuity to help you plan for golden years that truly are golden. Here are three of the most important:
It’s Almost Like One of Those Fabled Free Lunches.
You’ve heard the saying ‘There’s no such thing as a free lunch’ and maybe there isn’t, but an RA comes close. Historically, South Africans have not been good at planning for retirement and they find themselves in trouble financially. The Government wants to change that and so it’s not really an exaggeration to say that Government “pays” you to encourage you to save for your own retirement.
How do they do that? For starters they allow you to deduct contributions (up to 27.5% percent of your gross income) to your RA from your taxable earnings every single year.
And that can add up to some nice little annual cash windfalls.
Annuity Plans Your Best Retirement Option
Even More Tax Benefits
Another tax based benefit of an RA is the fact that, unlike every other kind of investment, you will not have to pay capital gains tax. The ‘bill’ for the tax due on your retirement annuity is deferred until you actually retire, which allows you to build up a larger balance that’ll compound, tax free, for as long as you remain invested in the plan.
Tapping the Power of Compound Interest
Uniquely, an RA literally forces you to save over very long periods which allows your money to start working for you as you start earning returns on your returns. If you are smart, start early and save for 30 years and you’ll actually end up getting less than 35 percent of the income you receive from an RA from contributions you made.
If that sounds a bit fuzzy, here’s a ‘real life’ example:
Lesedi, who is a smart, forward thinking young woman, gets her first part time job at 19. And that’s when she decides she will get into an RA and then invest R2000 each year for eight years. She achieves a return of 12 percent. She halts contributions at the age of 26, as she is ready to get married and begin saving for a home. She has a total of R16 000 invested when she puts her plan ‘to sleep.’
Her friend Amahle however does things differently. She waits until she 27 and more settled to get into an RA. When she does she invests the same amount every month as Lesedi did and achieves that same 12 percent return. She plans to do this for the next 39 years until it’s time for her to retire.
So, no doubt you are thinking that Lesedi was not so smart after all. But, thanks to compound interest if you think that Amahle will have more at retirement you’d actually be wrong. You see, by the time the ladies are ready to ride off into the sunset of retirement Lesedi will have R2.288-million – R700 000 more than Anneke’s R1.532-million. How? She invested much less, but started eight years earlier. Time and compound interest made her the winner. But imagine if she’d started at 18 and saved R2000 each year until she retired. That would have been an even bigger windfall!
Annuity Plans Your Best Retirement Option is most definitely the case, want to find out more or get some advice speak to one of our Financial Advisers today and start your journey to a healthy Financial Retirement.
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