Can I claim two income protection plans? How many RAs can I have? The experts answer
Perhaps you are at the start of your investment journey, or maybe you are midway through your career and have been saving for retirement for quite some time, yet you still have what might feel like quite rudimentary questions, such as:
- Am I wasting money paying for more than one income protector?
- How many retirement annuities can I invest in, and how much can I save into them?
- Does paying high management fees really make a big difference to my fund’s overall value?
Well, read on, we’ve got you covered.
Can I claim two income protectors?
An income protection plan is a form of insurance that pays you an income should you become ill or injured and unable to earn a living, either temporarily or permanently. People often hold more than one of these policies, but it is worth noting that you will not be able to claim for more than a specified portion of your total earnings regardless of how many policies you have.
"These policies are designed to protect you against loss of income; the limits are designed to avoid incentivising workers for not being able to work," says Jonathan Sierra, Employee Benefit Consultant at 10X Investments.
Some individuals may have personal disability cover as well as being covered through their employer’s retirement saving scheme, which amounts to duplication of the same cover. There may be reasons to maintain the private cover, but it is important to note that it will not mean a disability pay-out would exceed the income lost.
Insurers typically allow you to cover between 50% and 100% of your after-tax cost-to-company salary. Because the proceeds are not taxable the pay-out is calculated based on your after-tax income.
"As you are insuring against a loss, and the monetary value of that loss is known, you will not be compensated for more than you have lost," says Sierra. "In most cases, it would be better to avoid duplicating insurance. Rather invest the extra money into a savings product."
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How many retirement annuities can I invest in?
"There are no limits on the number of RAs you may invest into," says Michael Rossouw, Senior Investment Consultant at 10X Investments, "although there is no fundamental reason to invest into more than one RA."
A retirement annuity (RA) is a retirement fund for individuals. Pension and provident funds are group schemes, typically sponsored by employers. Investing into any of these three retirement savings vehicles makes you eligible for a tax refund. There are no limits on the amount you may contribute, but there is a limit to the amount that will attract tax relief.
If you join a company that offers a pension or provident fund for which you are eligible you are obliged by law to join. Starting an RA is voluntary but strongly recommended if you are not a member of a corporate fund. Members of corporate funds also frequently use an RA to supplement and/or diversify their investments.
You can claim a tax refund on retirement fund contributions up to the value of 27.5% of your income. This applies to an aggregate of contributions to all funds and is subject to an annual cap of R350 000. Depending on your tax bracket, you could get anywhere between 18% and 45% of the amount you saved back from SARS.
"You would be crazy not to take advantage of this opportunity to divert some of your taxes into your own retirement fund," says Rossouw.
The savings you build up in an RA are ringfenced until you are 55 years old, after which they can be accessed as monthly or annual income ie a pension. When fund members retire, they must use at least two-thirds of the total accumulated to buy an annuity (unless the value is below R247,500). Up to one-third can be taken as cash. This two-thirds rule has recently been standardised across all three types of retirement savings funds.
"While there is no fundamental reason to invest into more than one RA you might have personal reasons to do so," adds Rossouw. "For example, you may want to claim your RAs at different times to have more control over the income you draw every year. As you cannot access your RA in stages (the entire two-thirds must be converted into an annuity in one go) splitting your investments can facilitate this."
Does paying an extra 1 or 2% in fees really make a difference?
The fees you pay on your investments will have a significant impact on your total savings outcome.
"Although a fee difference of 1%, or even 0.5%, per year may sound small – especially when markets are performing well and returns are high – the long-term impact of a small fee difference is often the deciding factor in whether or not you reach your objective," says 10X's Rossouw.
"The fee impact becomes more pronounced the longer the investment term. You don’t lose just the extra fees you pay, but also the return you would have earned on that money in future. Whereas the impact is modest over a few years, over 30 or 40 years it is dramatic.
"For example, paying 3% in fees per annum, rather than 1%, over a 40-year savings term can knock more than a third off your final pension pot," Rossouw adds.
Although investment fees are inevitable, you should not be paying more than 1% per year in total. Unfortunately, many investment products in South Africa cost close to 3% per year, made up of 1.5% for investment management, 0.25% for administration and 0.75% for advice (plus VAT).
While the industry charges an average of 3% in fees, at 10X Investments you are always charged less than 1% before VAT.
- Ask 10X to do a free, no obligation fee analysis and cost comparison to see what difference paying low fees would make to your investment
This post is sponsored by 10X Investments and created by BrandStudio24 for Business Insider SA.