By Ross Marriner
The end of February is the final opportunity for savvy investors to optimise their tax savings for the current tax year by making additional contributions to their retirement annuities (RAs) and tax-free investment plans (TFIP).
Retirement Annuities: A tax-efficient, portable pension plan
Investing in a retirement annuity offers numerous benefits:
Tax Deductions: Contributions reduce your taxable income, lowering the amount of tax you will
need to pay.
Tax-Free Growth: Investment returns within a retirement annuity are exempt from income tax,
dividends tax, and capital gains tax.
Estate Planning Benefits: RA proceeds are not subject to executor’s fees or estate duty upon
your death.
Creditor Protection: Funds invested in a retirement annuity are protected from creditors,
offering financial security even during tough times.
At retirement, lump sums withdrawn from a retirement annuity are taxed according to government regulations, which may change periodically. However, the long-term benefits usually outweigh these tax
implications.
Even if you are already contributing to a pension or provident fund, adding a retirement annuity to your investment portfolio can be advantageous. Many employment-linked pension funds provide annual increases below inflation, which can place a strain on household finances for retirees. Supplementing
your pension income with proceeds from a retirement annuity can help bridge this gap and maintain your financial stability in retirement.
Tax-free investments: A flexible growth opportunity
Tax-free investments allow individuals to invest up to R3,000 monthly (R36,000 annually) with a lifetime contribution cap of R500,000. The key benefit of a tax-free investment is that all growth is completely
exempt from interest, dividends, and capital gains tax.
To understand the potential impact, a recent study by Old Mutual compared an investment of R2,500 per month for 200 months in a tax-free unit trust versus a similar taxable product. The tax-free option resulted in a final value over R175,000 higher than the taxable counterpart—highlighting the significant drain taxes can have on investment growth.
Comparing Retirement Annuities and Tax-Free Investments
While both retirement annuities and tax-free investment plans offer substantial tax benefits, there are
key differences:
Tax Deductions: RA contributions are tax-deductible (within limits), while TFIP contributions are
not.
Access to Funds: Tax-free investments funds can be accessed anytime, but in the case of a
retirement annuity, only a small portion of your money is available on an annual basis via the
new two-pot system. Accessing your retirement funds should ideally be avoided if possible.
Once you retire, a maximum of one-third of your capital can be withdrawn as cash, with the
remaining two-thirds used to purchase an annuity.
Both retirement annuities and tax-free investment plans provide diverse investment choices to suit individual needs. Consulting an experienced Certified Financial Planner® can help you identify the
products that best align with your financial goals and circumstances.
To meet the deadline imposed by most financial institutions, you should aim to make any contributions
well before the middle of February 2025. Failing to do so may result in you paying more tax than you
need to.
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
