The month of February is the last chance for shrewd investors to save tax this tax year by making top-up contributions to their retirement annuities and tax-free investment plans.
Retirement annuities: There are a number of benefits associated with investing in a retirement annuity, which is effectively a portable pension plan. Not only will your contributions reduce the amount of tax you are required to pay, but you will have an investment 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 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 withgovernment guidelines that may change from time to time.
It would be wise to consider investing in a retirement annuity even if you already belong to a pension or provident fund. Many pension funds declare pension increases that are lower than inflation. This can put massive pressure on household finances, especially if you are a pensioner who relies on his or her pension income in order to survive. If you had contributed to a retirement annuity in addition to your pension or provident fund, the income received from your RA could be used to supplement the often-reducing stream of income paid by your pension fund.
Tax free investments: You can currently invest up to R 3,000 per month (R 36,000 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 can be substantial. A recent study by Old Mutual compared an investment of R 2,500 per month for 200 months in a tax-free unit trust versus the same amount invested in a similar product where the abovementioned taxes were applicable. The analysis showed that the final investment value would be worth over R 175,000 more in the tax-free investment compared to the investment that was subject to interest, dividends and capital gains tax.
The tax benefits are slightly different when you invest in a retirement annuity as opposed to a tax-free investment. Firstly, your contributions to a retirement annuity are tax-deductible (based on a formula) but contributions to a tax-free investment are not. Secondly, funds in your tax-free investment can be accessed at any time but your 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.
You are able to choose from a wide range of tax-free investments and retirement annuity products. It
would be to your advantage to meet with an experienced Certified Financial Planner® to identify the
products most suited to 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.
