One of the best ways to save for the future and to decrease your tax bill is to make contributions to a retirement annuity. Retirement annuities are investment products that allow you to save for your retirement – and the underlying portfolio is NOT taxed.
Why an RA?
Individuals can contribute up to 27,5%, capped at R 350 000 per year, of their remuneration or taxable income to a retirement fund and use that contribution to reduce their taxable income. This can result in reduced taxes they have to pay. A ‘retirement fund’ refers to a pension or a provident fund, or a retirement annuity. This means that even if an investor already has a pension or provident fund, he/she can still make a contribution to a retirement annuity to reduce their tax liability.
What is a RA?
The modern retirement annuity can be described as a “pension fund for the individual”. It is a flexible, cost effective and transparent investment vehicle. The investor is the owner of the retirement annuity and he or she can choose the underlying funds in which the retirement annuity invests, depending on individual needs and the risk profile of the investor. The investor also has the option to stop or change contributions and can make an additional contribution at any stage.
Recurring contributions can be made during the year or lump sum contributions when you have the cash on hand. This is a great time of the year to exploit this tax saving tool while you increase the possibility of a financially sound retirement. The retirement that you deserve.
Advantages of an RA?
• You pay less tax, because the contributions are tax deductible.
• There are no capital gains or income tax [including tax on interest and on dividends] payable in a retirement annuity investment. Growth over time should therefore be better than in a similar after-tax investment.
• Flexibility of contribution is possible. You may decrease contributions to an RA temporarily or permanently if funds are tight. The opposite is also true. If you suddenly have more cash available (for instance, because of a bonus) your regular contribution to a retirement annuity can also be increased by doing an extra once-off contribution to your RA.
• The flexibility of contribution associated with a RA makes this the investment instrument of choice for someone who is self-employed.
Limitations of a Retirement Annuity?
This investment is aimed at retirement and therefore not accessible before the age of 55 (unless under special circumstances). The so called “two pot” system is said to be implemented on 1 September 2024 and will have an impact on the accessibility of retirement annuities (more info can be provided on request). Currently only one third of the accumulated capital can be taken as a cash lump sum at retirement of which the first R550 000 might be tax free and the balance taxed according to an applicable lump sum tax table. At least two thirds of the capital (at retirement) have to be invested in a compulsory annuity/pension at retirement that will provide you with a monthly income post-retirement. This monthly income will be taxable – the rationale being that your original contributions were tax deductible and therefore untaxed.
What is a Tax-Free Savings account (TFSA)?
A tax-free savings account is an investment where NO tax is charged on the gains (on interest, dividends or capital) made by the investment – not during the investment term and not when the investment pays out. Any money invested in a TFSA is therefore unfettered by tax and can generate maximum returns. Normally tax is payable on any gains (interest & capital gains) within an investment. This diminishes the returns.
What are the Advantages of a TFSA?
Interest earned, dividends received, and any capital gains made when the units are sold within the investment are totally tax-free. Even your withdrawals are made completely tax-free. Money invested in a tax-free savings unit trust account is accessible and can usually be withdrawn within days.
TFSA’s can be used for different objectives such as to boost retirement savings, emergency savings, and other specialized goals. There are no penalties on withdrawals and these withdrawals are also tax-free. Even though the goal of a TFSA is to save for the long term, its accessibility is a huge benefit.
Each individual is allowed to contribute up to R36 000 (this is the current maximum tax-free contribution) per tax year, limited to a maximum of R500 000 over a lifetime. All growth is thus tax-free!
What are the Limitations of a TFSA?
Funds invested in a TFSA should ideally be invested for as long as possible, in order to benefit as much as possible from the character of this investment vehicle. Investment capital and investment returns in multi-asset unit trusts cannot be guaranteed. In order to qualify for tax-free status, a collection of unit trusts must meet certain requirements and may only invest in certain funds. There is an annual R36 000 and a lifetime R500 000 limit on all contributions. If you make a withdrawal from your TFSA, that withdrawal can never be replaced by new investments. As with other investments there are terms, conditions and risks associated with investing in Tax Free Savings Accounts.
These are two fantastic tax-saving products that can be used to create future wealth for you and your family. Both are absolute must haves, and therefore the question is not whether you can afford to contribute to these tax friendly products, but rather whether you can afford not to.
If you are interested in hearing more about these two must-have tax-savings opportunities, please contact us.