Investment vehicles where SARS boosts your returns!
FOR MANY South Africans, just the mention of SARS leaves them with a real sense of dread. Dread of potentially missing a tax contribution deadline, dread of the potential need to actually pay SARS an outstanding penalty, and the dread of SARS contacting you in the first place.
But surprisingly, for all the appropriate and measured dread and our suspicious resistance to the beloved taxman, SARS does have your proverbial back—especially when it comes to your retirement savings.
In fact, the tax system has been engineered with tools to help ordinary South Africans save for their retirement in innovative ways that belie our deeply entrenched fears. So, perhaps it’s time to change our paradigm from dread to delight, because what we are about to share with you just might convince you otherwise.
Let’s lift the lid on two SARS-approved retirement saving interventions that may very well surprise you and, in turn, have you laughing all the way to the bank when you are 65!
The magic of retirement annuities
One of the top retirement investment vehicles that also provides a tax-efficient way to save for your retirement while actively managing your money, is a retirement annuity (RA).
This financial instrument enables you to access numerous retirement-saving tax incentives, while also facilitating the reduction of your annual tax liability.
Here is a simple explanation
Every rand you save yearly in a retirement annuity is tax-deductible. This amount is allowed to grow tax-free until your retirement.
This tax value is calculated at 27.5% of your annual taxable income, up to a maximum of R350 000. (Any contributions above the annual limit can be carried over to future tax years, where it can be used as a deduction, subject to the annual limits.)
Let’s apply this tax incentive to the salary of a typical taxpayer (let’s call him Sipho):
- Sipho earns R650 000 taxable income per year.
- He decides to open a retirement annuity and make regular contributions to it.
- The maximum tax-deductible contribution Sipho can make towards his retirement savings would be R178 750 (27.5%) per tax year.
- At the end of the tax year, given that Sipho made the maximum contribution, his tax liability to SARS would be calculated on R471 250 (R650 000 – 27.5%), instead of R650 000.
- Sipho’s annual taxable income is now reduced because he has made monthly contributions towards his retirement by simply saving with a retirement annuity.
Reduced income tax
SARS is literally reducing your annual tax liability because you have chosen to start saving for your retirement!
Your taxable income can decrease by the amount you save for retirement. This means you can move yourself into a lower tax bracket by saving for your retirement, which means you not only save the tax on the money you put in your RA, but you could also be paying less tax on all your other income.
RAs are also a win for tax-efficient estate planning
The cash contributions that accumulate within your RA make it ideal for estate planning. Let’s take a look at some of the benefits offered by your RA:
- Your RA does not form part of your estate, and therefore no estate duty is payable on the investment or the growth of the RA investment.
- The investment growth of the RA is protected from creditors.
- You will pay no tax on the dividends or the growth you receive from the money invested in the RA.
Investing in an RA quite literally saves you tax, both in life and in death. Retirement annuities also provide payment flexibility and the ability to choose the underlying assets in which you wish to invest.
Whether formally employed or self-employed, you can take out an RA that will provide a welcome buffer and protection tool for your retirement savings.
A little note on life wrappers
However, if you are new to the world of RAs, here is a word of caution on investing in an RA.
Avoid taking out an RA with a life wrapper, which is often offered by life insurance companies. The reason being that they are notoriously rigid, expensive, and charge penalties when your premiums are reduced or stopped.
Their fees are also prefunded, which means a large portion of your contributions for the first three to five years goes towards funding fees.
TFSAs—a tax-saving goldmine
As the saying goes, you are only as good as the information you know. The same is true for Tax-Free Savings Accounts (TFSAs)—if you don’t know what they are, you will never know what they can do.
TFSAs are the next weapon in your arsenal of tax-efficient tools. Saving for your retirement becomes much easier, because they offer—as the name suggests—tax-free savings.
By way of illustration, if you have ever had to pay tax on a lump-sum cash withdrawal, you will remember all too well the sinking realisation that a juicy portion of said sum had an obligation to march to SARS to fulfil its tax requirements.
A TFSA provides the perfect vehicle for long-term savings, because – provided you saved within the limitations of your monthly and lifetime contribution requirements – you will be able to withdraw the full amount without paying a single cent in tax when you retire. Now that is good news!
Here is how it works:
- Your annual contribution to a TFSA may not exceed R36 000 per annum.
- Your lifetime contribution to a TFSA may not exceed R500 000, as defined by SARS.
- This gives you a saving / investment horison of 14 years (this is an important point of consideration).
TFSA accounts are good if:
- You have not started saving for your retirement yet; and
- Believe you don’t save or have not saved enough.
These TFSA can be made up of a com-bination of local and offshore unit trusts.
According to Alex Forbes, whether you are saving for your children’s education or a dream holiday, the tax-free savings account is a simple, flexible, affordable investment to save towards your goal.
Tax benefits of a TFSA
With a TFSA you will pay no capital gains tax or dividends tax.
However, it is important to consider your liquidity requirements. If you need your cash within five years, perhaps a TFSA is not ideal – but if you can invest for the longer term, you will also benefit from compound interest.
The longer you don’t touch your investment in your TFSA, the more interest you will earn – and when it’s finally time to cash out, it will be tax-free!
So, what are you waiting for?
With a wide range of tax incentives available to South Africans to start saving towards their retirement, the best time to begin is today.
Starting with as little as R500 per month and a little patience, knowledge, and a willingness to shift the needle from retirement-panicked to retirement-ready, the horison of 65 will be a milestone you’ll be empowered to reach.
Atleha-edu is a non-profit organisation providing financial education to retirement fund trustees and members, in partnership with Strate and the ASISA Foundation.
