Maximise your tax savings

Topping up your retirement annuity (RA) contributions before 28 February is an excellent way of making the most of your available tax deductions.

Tax benefits

A percentage of your annual contribution towards an RA is tax deductible. You can therefore claim back a portion of your contribution from SARS, without any impact on the value of your investment. The higher your annual contribution towards an RA in any given tax year (up to the specified limit) the higher your tax benefit will be.

The maximum tax deduction for all contributions to retirement annuity funds, pension funds and provident funds, is 27.5% of remuneration or taxable income (whichever is the greater). The annual maximum tax deduction limit for any of these retirement vehicles is R350 000. It is beneficial for taxpayers to calculate the maximum allowable deduction that they qualify for before the end of the tax year and to top up their RA contributions to get as close to this amount as they are able to.

Any amount of your contribution that exceeds the maximum allowable tax deduction amount in any given tax year can be carried over to subsequent years. This deferred tax benefit can be used to reduce the taxable portion of a lump sum payment when you retire, or to supplement your annuity payments in retirement.

Additional tax benefits of investing in an RA is that no income or capital gains tax is levied on the investment returns accrued and the funds accumulated in the RA is not subject to estate duty or executor fees. Upon retirement, investors are able to withdraw a third of the value of the RA as a lump sum of which the first R500 000 do not attract any income tax. It is important to note that the tax bill on your retirement cash lump sum takes all previous taxable cash lump sums you have received into account, including severance benefits and cash lump sums withdrawn from a living annuity. While there is no limit on the number of RAs that an investor can invest in, the tax benefit is calculated on the collective amount and not per individual RA.

Additional benefits

With an RA your investment is well protected and your exposure to riskier asset classes is limited by the Pension Funds Act. An RA also offers protection from creditors and insolvency, and it is not dependent on your state of employment.

Accessing your funds

Investors may access the funds in their RAs when they reach the age of 55, or at an earlier age in the event that they are forced to retire due to ill health. Another exception is when an investor formally emigrates, and the emigration has been recognized by SARS.

Invest in a tax-free savings account (TFSA)

Once you have topped up your annual RA contribution, you may also want to consider investing in a TFSA. The main benefit of a tax-free savings account is that, the same as with a retirement annuity, there is no taxation on the growth of your investment, which leads to increased returns.

Among others, a TFSA can take the form of a money market or fixed-term bank account, a unit trust investment or a JSE-listed exchange traded fund. If you are looking for accelerated growth on your investment, a TFSA is a better option than a regular savings account due to the added tax benefits.

An investment in a tax-free savings account is limited to a maximum amount of R36 000 per year and a lifetime limit of R500 000. While there is no taxation on the growth of your investment in a tax-free savings account, contributions are made from after tax funds and, unlike contributions to an RA, you do not receive a tax deduction for investing. TFSAs are meant to encourage saving and are not meant to replace retirement products. A TFSA can, however, be used to supplement your retirement investment in a tax-efficient way.

The information contained in this article is of a general nature and intended for information purposes only. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial, legal or other issue. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner/adviser to take into account your particular investment objectives, financial situation and individual needs.