10 Benefits of Investing in a Retirement Annuity

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In the modern world, making your money grow by means of sources of passive income is fast becoming one of the major financial trends worldwide.

A growing number of people are no longer relying as much on direct income, such as salaries from jobs or revenue from businesses, to increase their wealth, but are instead turning to investments as the smart way to make money without having to work for it. The obvious appeal of this approach has contributed highly to its popularity, and the number and diversity of the different investment opportunities that are available have increased accordingly. Understanding the various options available to investors is a first and vital step towards making sound and profitable investments that will yield consistent returns.

One of the most popular investment opportunities on the market today can be found in the area of retirement annuities. These funds are essentially investment vehicles for people who do not participate in any existing pension scheme or provident fund, allowing them to secure their future finances in a more tax-effective way than many others. Self-employed people, as well as those working in jobs that do not include pension benefits, and those who earn a substantial amount of non-pensionable income, can all make use of retirement annuities to increase their savings towards retirement.

There are many benefits associated with investing in a retirement annuity. Some of the most prominent advantages of such an investment include the following:


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1. The ability to choose

The popularity of retirement annuities have led to considerable diversification in the market, allowing for many different options for potential investors to choose from. Being able to choose your underlying investment allows for more flexibility, and more control over where your money goes and its potential for growth.

2. Room for growth

One of the potential disadvantages of standard pension funds is that they most often require a fixed percentage of your salary as a monthly or annual contribution. This can place a drain on your finances, sacrificing present expenditure for the sake of future savings.

While this can be appealing to some, retirement annuities offer greater flexibility in this regard, allowing you to increase your contributions over time. For instance, a smaller percentage of your regular salary can be contributed for a certain period before being increased, and lump sum contributions can also be made to add to the investment.

3. Diversity

Rather than investing in just one asset class, as is usually the case with standard pension funds, retirement annuities allow you to diversify your investment portfolio across many different areas, such as offshore assets, private equity, and direct property. Savvy investing in this manner can give your money increased potential for growth, yielding higher returns in the long run.

4. Long-term growth

The modern market is known for its unpredictability, and this can make things difficult for investors of all kinds. With a retirement annuity, however, your risk can be lessened considerably by the fact that the returns on consistent contributions are likely to average out over a period of many years regardless of the ups and downs and general fluctuations of the market.

The long period over which you will hopefully draw your pension will also help in this regard. This financial advantage can give you peace of mind in a turbulent market, knowing that your investments will remain relatively unaffected in the long term.

5. The ability to support dependents

No one likes to think about the worst that could happen, but virtually everyone recognises the need to prepare for it. This means ensuring that your dependents are taken care of in the event of your untimely death. Retirement annuities can provide some of the best financial security in this regard, especially if death cover is taken out on the investment.

Furthermore, benefits from retirement annuities generally do not form part of the deceased’s estate, so even if you are insolvent at your time of death, your family will still receive benefits from the annuity fund rather than the money going to your creditors.


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6. Saving your savings

The concept of saving has taken on many different meanings in today’s economic climate, with fewer and fewer people focusing on long-term saving. While this allows for greater expenditure in the short term, in the long term this means that less money is left towards the end of your life. Retirement annuities protect you from this outcome by restricting access to your savings until you turn 55, eliminating the temptation to dip into the fund before you reach retirement age.

7. Compound interest

It was Albert Einstein who said that “compound interest is the most powerful force in the universe”, and he wasn’t far wrong. When you earn interest on your interest in this way, the potential for financial growth increases exponentially over time, resulting in higher dividends when you finally cash in on your investment.

8. Tax-effectiveness

South African law allows you to invest up to 15% of your annual income tax-free. You are also able to invest before-tax money without being subject to capital gains or income tax. This makes investment opportunities such as retirement annuities particularly attractive, and ensures that a substantial proportion of your earnings can be saved for your retirement without being taxed at all. The growth of your investment also remains in the policy, maximizing the benefits your receive upon retirement.

9. Ensuring sufficient savings

When it comes to saving for a retirement, a general rule of thumb is that saving 15% of your salary over 35 years will allow you to receive 75% of your salary as a pension. However, this system does not take into account benefits that go with your salary, such as bonuses, medical aid, and other allowances. Having to cover these costs as well once you retire can require the added financial benefit offered by retirement annuities.

10. A comfortable retirement

Investing in intelligent opportunities such as retirement annuities means that you can set yourself up for retirement and maintain the lifestyle with which you are comfortable.


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