If you are in a position to take advantage of the tax breaks available in this tax year, now is the time to do so.
You can invest up to R 3 000 per month (R36 000 per annum) in a tax-free investment, with a lifetime contribution limit of R 500 000. The benefit of investing in this type of investment is that all growth is completely free of interest, dividends and capital gains tax. The drain that these taxes can potentially have on the end value of an investment is substantial.
For example, Old Mutual recently examined the difference between a saving of R 2 500 per month invested over 200 months in a tax-free unit trust, versus the same amount invested in a similar product where the abovementioned taxes were applicable. The result was that the value of the tax-free savings plan was worth approximately a million Rand more than the investment where the growth was not tax-free.
Another way to save tax is to contribute to a retirement annuity. There are a number of benefits associated with investing in this type of investment – which is effectively a portable pension plan. Not only will your contributions reduce the amount of tax you are required to pay, but will enable you to grow a pool of savings from which an income can be drawn once you reach retirement age. The investment growth of a retirement annuity is not subject to any form of tax and the proceeds are not subject to your executor’s fees or estate duty in the event of your death. If you encounter financial difficulties, the funds invested in a retirement annuity are protected and cannot be attached by a creditor. Lump sums from retirement annuities at retirement are taxed in line with government guidelines that may change from time to time. Currently the first R 500 000 is tax-free.
It would be wise to consider investing in a retirement annuity even if you already belong to a pension or provident fund. Many of these schemes declare annual post-retirement pension increases that are lower than inflation. This puts massive pressure on household finances if you are relying on your pension. The income received from a retirement annuity can supplement the reducing stream of income paid by your pension fund.
The tax benefits are slightly different when you invest in a retirement annuity as opposed to a tax-free investment. First, your contributions to a retirement annuity are tax-deductible (based on a formula)but contributions to a tax-free investment are not. Secondly, the tax-free investment can be accessed at any time but the retirement annuity can only be accessed at retirement, with a maximum of up to one-third that can be taken in cash and two-thirds must be used to purchase an annuity after retirement.
To qualify for these tax saving opportunities in the 2020-21 tax year, please make sure that you invest timeously, well before the end of February 2021.
There are different tax-free investments and retirement annuity products available, so it would be to your advantage to contact an experienced Certified Financial Planner® to discuss a solution that will meet your individual requirements.
Rands and Sense is a monthly column, written by Ross Marriner, a CERTIFIED FINANCIAL PLANNER® with PSG Wealth. His Financial Planning Office number is 046 622 2891.