Tax Benefits

Boost your retirement annuity for relief

Boost your retirement annuity for relief
With the tax deadline looming at the end of February 2013, now is the time for South Africans to re-evaluate their contributions to their retirement annuity (RA), in order not only to ensure they are on track to achieving their retirement financial goals, but also to minimise their tax contributions by maximising the deductions available for income tax purposes.
This is according to Henry van Deventer of Acsis, a leading financial advisory company, who says that there are several benefits for those who top up their investment contribution to their RA before the tax deadline. “Not only will increasing your RA contributions maximise the tax-deductible amount before the end of the tax year, but it will also boost retirement savings, thereby ensuring the possibility of a more financially secure retirement.”
Currently in South Africa, individuals are permitted to deduct a maximum of 15% of their non-pensionable income, with exemptions from capital gains tax, income tax on foreign dividends and interest and dividends withholding tax.
Van Deventer says that contributing to a RA is an effective method to defer paying tax before retirement and, as a result, it is advisable to invest extra capital into an RA where possible. “Individuals should consider investing their bonus, or other income that was generated during the year, as an additional lump sum contribution to their RA before the tax cut-off date, as this could potentially increase their allowable deduction for RA contributions.
“Not only will this contribution result in individuals paying less tax, but their retirement savings will also have received a boost and the returns from this will continue to compound, tax-free, for as long as the money is invested.”
He adds that while individuals will pay tax when drawing the money as a pension in retirement, this money will be taxed at a lower marginal rate, meaning less tax will have been paid on the money.
Van Deventer illustrates how an additional lump sum contribution can reap rewards for individuals: “For example, if an individual earns an annual salary of R300 000, but is unable to contribute the maximum of 15% of their salary to a retirement fund, yet contributes a lump sum payment of R20 000 to a retirement vehicle, this will result in their taxable income being reduced to R280 000.
“This will also result in the individual paying R6 000 less in income tax, which effectively means they are receiving a R20 000 investment for the price of R14 000 and receive a ‘free return’ of 43% before they’ve earned a single cent of investment growth. Added to the fact that interest, dividends and capital gains are tax-free in a retirement vehicle, this amounts to an even greater benefit over time.”
He advises, however, that there are specific considerations that individuals need to bear in mind before making the decision to invest additional money into their RA. “If individuals already invest 15% of their pre-tax income in a retirement annuity, pension or provident fund, they will not get an immediate tax benefit for any additional savings in a retirement vehicle. They will, however, pay less tax on lump sums they take at retirement for such additional savings.
“Investors should also remember that they can only access these funds from age 55 and that these investments cannot be used as security for loans. When you retire, at least two-thirds of your retirement annuity investment must be used to purchase a retirement income annuity.
“While investing additional capital has benefits, each individual’s financial plan and, ultimately, where they put their money, needs be continually assessed according to their financial needs,” concludes Van Deventer.
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This edition

Issue 72