To go with a RA is one of many choices you have when you save for retirement. Here are five things you must know if you are thinking about taking out a new one or if you already have one.
1. It's a legal contract you sign and therefore a long term commitment.
When you choose the retirement (or maturity) age for the RA, you can normally choose an age between 55 and 70 (this is the time by which the policy will pay out). You choose this date, but it cannot always be changed afterwards.
Make sure that you:
a. can continue with premiums if you choose a later retirement age. For example, if you choose a retirement age (for example) 65 years, but you want to retire earlier, the company may charge a penalty because you are not completing the full contract term;
b. rather choose 55 years as the retirement age but then continue with the policy after that as long as you can before you apply for the payout; and
c. know beforehand that you don’t have access to the money, unless in certain circumstances, such as emigration or permanent disability.
2. When to get professional help in determining what amount you should save per month.
A broker can help you with three important decisions, namely:
a. To determine your retirement goal(s). By doing retirement planning, a broker can advise you on what you need to save in order to retire at a certain age. The broker will take into account what you earn, what you have saved up already (if any), at what age you would like to retire and also if you have any pension or provident benefits with your employer.
b. The broker helps you determine what premium you should start with (and how the premium should grow each year) to reach your retirement goal. It does not mean that you will be able to afford it but it will put your planning into perspective. You may need to extend your retirement age, make serious budget cuts or pay off debt to make your retirement plan a reality.
c. A broker can give advice when you want to add lump sums to your policy such as transfers from a previous employer or money that you have saved up yourself.
3. Start saving when you're young, as it greatly influences the RA’s value at retirement.
If you start a RA at age 20 with a retirement age of 60 years, then you may end up with three (or more) times the amount of someone who started at 40 years with the same monthly premium.
If you are under 30 years, you should save at least 10% to 15% of your gross salary (this is your salary before any tax or other deductions are made). This will include what you save with your employer, if any. If you start to save for the first time when you’re 30 years or older, you have to increase this percentage to 20% and when 40 and older when you start a RA, up to 25% of your income must preferably be saved for your retirement.
My advice here is:
a. Start saving when you start earning income with your first job.
b. If you cannot save what you should, at least start with something and add to it as you have paid off debt, received promotions or salary increases at work or had a chance to make budget changes.
4. When are you allowed to take the value (without any penalties) before 55 years?
There are two cases where you can take the full values before 55 years of age.
a. You can withdraw the value if you have a successful permanent disability claim (part cash and monthly income or only a monthly income); or
b. You can take the full value if you have emigrated to another country. You need to have proof, for example, of the emigration and that you don't have a South African bank account or tax number anymore.
5. What happens if you become permanently disabled?
If you become permanently disabled while you are paying a RA, you have two choices:
a. You can exercise the same choices as mentioned before (part cash and monthly income or only a monthly income); or
b. if you have a benefit on the policy called “Waiver of Premiums”, then you can continue with the policy but the company will then pay the premiums on your behalf until the policy reaches its maturity age. In most cases you need to be healthy to be able to add this benefit. Ask your broker to include this in the quote.
Stay tuned for Part 2 of this series.