Retirement annuities as an alternative to a trust

Retirement annuities offer numerous tax advantages and are powerful tools for estate planning.

By  Wouter Fourie
CEO of Ascor® Independent Wealth Managers and co-author of The Ultimate guide to Retirement in South Africa

For many navigating the financial planning landscape, the thought of managing a trust might seem daunting, especially when considering the costs and complexities involved. That’s where the idea of leveraging a retirement annuity as a strategic alternative comes into play. Not only do retirement annuities offer numerous tax advantages, but they’re also powerful tools for estate planning, aiming to foster asset growth outside of one’s estate. When structured with care, a retirement annuity can serve as an efficient and effective substitute for a trust.

The shift towards retirement annuities

In the realm of financial planning, deciding between a trust and a retirement annuity is more than just a choice – it’s a pivotal decision that can significantly impact one’s estate planning and tax strategy. Retirement annuities have gained traction as a favoured option for those seeking a simpler, tax-advantaged route to estate planning. The increase in tax deduction limits from 15% to 27.5%, with a cap of R350 000 annually, has only sweetened the deal, enhancing the appeal of retirement annuities within a well-rounded financial strategy. This tax incentive, combined with the allure of tax-free growth on investments, positions retirement annuities as a prime choice for those looking to maximise their estate’s value while minimising tax liabilities.

Shared advantages with trusts

Despite their differences, retirement annuities and trusts share some fundamental benefits:

• Protection against creditors: Similar to trusts, retirement annuities offer a layer of protection for your assets against creditors, thanks to specific safeguards outlined in the Pension Funds Act.

• Asset growth outside the estate: Both retirement annuities and trusts enable assets to appreciate outside of your estate, effectively reducing potential estate duty implications.

• Estate duty exemptions: Like the assets held within a trust, approved contributions to a retirement annuity are excluded from your estate, offering a clear estate duty advantage.

• Fiduciary duties: The fiduciary responsibilities of managing both trusts and retirement annuities align closely, with an emphasis on asset protection and equitable distribution in accordance with legal mandates.

Considerations on liquidity

However, it’s important to be mindful of the liquidity restrictions associated with retirement annuities. Access to your funds is generally restricted until you reach the age of 55, at which point you can only withdraw up to one-third of the total value. This limitation highlights the need for strategic financial planning to ensure that your short-term liquidity needs are balanced with your long-term financial security.

Making the right choice

The decision to opt for a retirement annuity over a trust is deeply personal, hinging on your individual financial goals, estate planning requirements, and tax considerations. Retirement annuities distinguish themselves through their tax efficiency, protection from creditors, and streamlined wealth transfer capabilities, making them an appealing alternative to traditional trusts for many.

Nevertheless, engaging with a financial planning or estate planning professional is crucial to tailor this decision to your specific circumstances, ensuring that your financial strategy is comprehensive, cohesive, and aligned with your overarching financial objectives.

In conclusion, a secure retirement requires careful planning, professional advice, and an active role in managing your retirement funds. Before making any decisions, it’s critical to consult with a certified financial planner. The financial landscape is complex and constantly evolving, making it essential to seek advice from those with the requisite knowledge and experience. Be wary of relying on commentary from individuals who may not possess the professional background necessary to provide sound financial advice.

“The greatest risk in investing is your own behaviour,” said Warren Buffett.

My best-seller book, The Ultimate Guide to Retirement in South Africa, co-authored with award-winning editor Bruce Cameron, provides readers with comprehensive information on retirement planning in South Africa. For more information about the book, visit www.retirementplanning.co.za or email me at wouter@ascor.co.za

This article first appeared on moneyweb.co.za at https://www.moneyweb.co.za/financial-advisor-views/retirement-annuities-as-an-alternative-to-a-trust/

Contact Ascor®Independent Wealth Managers for retirement planning advice.

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