Why should you consider a retirement annuity (RA) to prepare financially for retirement?
They offer:
- Tax advantages
- a Disciplined way to save enough to invest for growth
However, some complex details should be considered when investing through a retirement annuity.
1. You can transfer your insurance RA to a unit trust platform
- A traditional, insurance-based RA policy can be transferred to a unit trust platform
- Check with your insurer if they charge any cancellation fees for this
- The transfer process can take some months to complete
Ask your financial advisor to prepare a cost-benefit analysis to help you make an informed decision about making a transfer. There are no expensive upfront commissions paid to your financial advisor, (as in the case of an insurance RA) – instead, your advisor earns an advice fee -charged per annum -as a percentage of your invested capital.
2. RA vs preservation fund (how to preserve your retirement benefits)
- A preservation fund – is one way to save employer-sponsored funds
– when you retire, you stop paying into this fund
– you can make a full or partial withdrawal before age 55
- retirement benefits in an RA structure – you can continue to pay into the fund after retirement (regularly or ad hoc).
– An RA will not allow you to access the funds before the age of 55.
3. You can invest in as many RAs as you like
- You are permitted to invest up to 27.5% of your taxable income on a tax-deductible basis towards an RA (one or more approved retirement fund)
- But there is no tax advantage to having more than one RA
- If your RA is invested on a LISP* platform, you can fully diversify your investment (subject to the limitations of the Pension Funds Act), within a single RA
- So additional RAs will not mean extra investment diversification
4. RAs are more tax-efficient than TFSAs (Tax-free savings accounts)
- RAs and TFSAs – no tax payable on any dividends or interest earned
- No capital gains tax consequences
- The major difference – your contributions towards an RA are tax-deductible up to 27.5% of taxable income – and your contributions towards a TFSA are made with after-tax money
- So consider TFSAs once you’ve maximised your tax-deductible contributions towards an RA
5. The funds in your RA are protected from creditors
- Your RA funds are protected from your creditors in the event of insolvency
- BUT certain monies can be deducted from your pension fund money, including money owed to SSARS and amounts payable under the Divorce Act and Maintenance Act.
To prepare for your retirement, see what other retirees have to share –
Navigating Retirement Challenges
As we conclude Part 1 of ‘Retirement – Dream or Nightmare!’ exploring the intricacies of Retirement Annuities, stay tuned for Part 2 on our website and social media platforms, where we continue unraveling the remaining essential insights to help you craft a secure and prosperous retirement plan.
*LISP – an administrative platform – registered with FSCA – that packages, distributes and administers a range of investment products. (Linked Investment Service Provider).
