Save on tax with a Retirement Annuity before 28 February

The end of the tax year – 28 February – is fast approaching. If you as an investor or taxpayer have not done so already, now is the time to make use of a great government incentive that encourages people to save for their retirement in a tax-efficient retirement annuity (RA).

Making use of this incentive before 28 February will save you money on your current tax payable, defer some of your tax commitments, allow you an additional tax deduction now, save more towards your retirement and allow you further tax savings after retirement. It is an incentive simply too good to pass by.

Save on Tax with a Retirement Annuity

“At a time when most tax regimes seek to make us pay more and more tax, this is one of the few options that allows you to pay less tax and save for the long term at the same time,” says Director, Kieron McRae of Cape Town-based Carrick Wealth, leaders in wealth and capital management.

Any individual, including expats, who pay tax to the South African Revenue Service (SARS), can benefit from this incentive. Anyone can invest in an RA – from individual employees wanting to supplement their existing pension or provident fund contributions, to individuals who do not yet have a saving structure in place, or investors seeking to enhance their retirement plan while limiting costs.  Even employers can offer their employees a group retirement annuity: individual RA accounts for each employee managed on a group basis.

 

Here’s how it works

According to Kieron, the government at present allows you to make tax-free contributions to an RA up to whichever is the higher of 27.5% of your taxable income or your remuneration (SARS distinguishes between the two), capped at R350 000 per year. And you don’t have to do this in monthly payments spread over the year; you can decide, for instance, a month before the end of the tax year on 28 February, to review your retirement portfolio and claim the full allowable deduction for the entire tax year.

You are protected as well by retirement fund rules in that Regulation 28 of the Pension Funds Act limits your exposure to riskier asset classes. Furthermore, should you wish to exceed the limit of 27.5% of your income that you may invest tax-free in an RA, SARS will not penalise you. You can invest as much as you want at any time, whether this be your own or deemed contributions to an approved fund, including a pension or provident fund. This also takes into account contributions made by an employer.

However, contributions to an employer-sponsored fund may not utilise the full 27.5% allowed, which means you could be losing out on a lucrative tax deduction to which you are entitled.

 

Benefits of investing in a tax-saving RA

There are numerous benefits attached to saving in an RA, both immediately and in the longer term. These include:

  • Annual investments in an RA are tax-deductible from your taxable earnings., subject to an annual limit of ZAR 350 000.
  • Growth in your RA is exempt of dividends tax, income tax on interest, and capital gains tax.
  • You will be paying less tax now, as your RA contributions will be made from earnings on which you have not yet paid tax.
  • In this way you will be able to defer tax liabilities to a later date, when you will be paying tax; in other words, you defer paying income tax on your interest, dividends, and capital gains until your retirement when you withdraw amounts out of your RA.
  • However, at retirement you will receive further favourable tax benefits such as the tax-free transfer into a living annuity, where the growth is also tax-free
  • You may also benefit from paying a lower average tax rate on the benefits withdrawn from the RA after retirement.
  • Up to one-third of your RA benefit can be withdrawn any time after the age of 55; the rest must be invested in an income-providing product, such as a living annuity or a guaranteed life annuity, but the tax payable on such income is likely to be at a lower rate than when you were making contributions, thus providing for potential additional tax savings.
  • The first R500 000 of any lump sum withdrawn from your RA at retirement is tax-free, but the sum is calculated from withdrawals from this RA plus any withdrawals made from any other retirement products before retirement.
  • Further benefits are that an RA offers protection from creditors and insolvency, and it is not dependent on your continued employment.

 

Estate planning benefits

The first ZAR 350 000 lump sum investment will be exempt from estate duty…a further big saving. Historically, your full contribution was, and still remains, off balance sheet for estate duty purposes. You may nominate beneficiaries for your RA, although the trustees will determine allocation of its benefits between the nominees and any dependents you may have. Except for in very specific prescribed circumstances, you will not be able to access your RA before the age of 55. Thereafter it is not subject to a maturity date and you can access it at any time.

 

Enjoy peace of mind

If you have not yet reached the limit allowed for the tax year, you have until 28 February to make full use of it. That is why this time of the year is always a good time to reflect on your tax and retirement planning and take the appropriate action.

You’ve worked hard to grow your wealth. Now is the time to protect and preserve it. Additional tax benefits in saving for your retirement will go a long way towards achieving this goal. In order to holistically reassess the tax-efficiency of your long-term savings plan, it would be best to do so with a qualified, independent financial adviser.

Click here to receive our Retirement Annuity fact sheet or to request for one of our wealth specialists to contact you to assist you with reducing your tax liability before the tax year closes.  Be sure to provide a contact telephone number.

Carrick Wealth is a registered South African financial services provider specialising in South African and international financial planning. Carrick is also licensed in Zimbabwe and Botswana, and holds three global licences in Mauritius. Carrick at all times maintains its independence with regard to product providers and asset managers, providing bespoke risk assessment, financial planning and other services to high net worth individuals (HNWI). Through our own qualified and experienced financial advisers, as well as through partnerships with industry leaders in the fields of foreign exchange, tax, international property, offshore bank accounts, trusts, wills and estate planning, Carrick is able to provide the highest levels of service for your financial planning and investment requirements, both offshore and domestic. This communication is intended solely for information purposes for the use of designated recipients and is not an offer, recommendation or solicitation to transact. While it is based on information available to the public and from sources believed to be reliable, Carrick makes no representation that it is accurate or complete or that any returns indicated will be achieved.