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Many of us, to our own detriment, neglect or defer till later to save for our retirement or view it as yet another monthly burden on our cash flow. However, investing in a Retirement Annuity (RA) now is not only a great way to save for the longer term, but it can also substantially reduce your tax liability for the current tax year and beyond. And it also has numerous other money-saving benefits over the longer term.
This applies to anyone paying tax to the SA Revenue Service (SARS) regardless of whether you already have an RA and just want to top it up, acquire an additional one or are investing in one for the first time. But to utilise the generous saving on your current 2018/2019 tax liability, you must do so before the end of the tax year on 28 February. The tax benefit on your ongoing contributions to an RA will continue for each year thereafter, with more benefits after your retirement.
“Not only is an RA an excellent financial planning and saving tool, it is also very tax-efficient. While tax regimes everywhere are making us pay more and more taxes, this is one of the few exceptions where government is actually encouraging us to pay less tax so that we can save for the future. It is also flexible and can be tailored to suit your specific requirements and financial capability,” says Paul de Waal, Director: Wealth Management and Advisory of wealth management firm Carrick Wealth.
Tax, savings and other benefits
The many benefits of saving with an RA include the following:
- Contributions to an RA are tax-deductible up to 27.5% of remuneration/taxable income, subject to an annual limit of R350,000.
- You can save on your long-term tax liability by making contributions in excess of the limit, which can then be carried forward to offset future taxable retirement income.
- You don’t pay income or capital gains tax during the term of the investment; dividends are also exempt; and your estate will pay no estate duty on the first R350,000 annual contributions.
- There is no compulsory retirement age and you can contribute at any age at any time, in a lump sum or regular instalments, and you can choose to let your RA mature at any time after age 55.
- Paying tax is effectively deferred until retirement when you start drawing income from your RA, but you are likely to pay a lower average tax rate on the benefits after retirement. And unclaimed or disallowed contributions may be deducted on retirement.
- Up to one-third of your RA benefit can be withdrawn any time after the age of 55; the rest must be invested in an income-providing product, such as a living annuity or a guaranteed life annuity, but the transfer as well as the growth will also be tax-free.
- The first R500,000 of any lump sum withdrawn from your RA at retirement is tax-free, but the sum is calculated from withdrawals from this RA plus any withdrawals made from any other retirement products before retirement.
- With an RA your investment is well protected and your exposure to riskier asset classes, such as e.g. equities, is limited by the Pension Funds Act. An RA also offers protection from creditors and insolvency, and it is not dependent on your continued employment.
Immediate 2018/2019 tax saving
Although RAs offer tax benefits over their full term, you can reap substantial tax savings right now by increasing your contributions to your existing RA or acquiring a new RA before 28 February. And you don’t have to do this in monthly payments spread over the year to qualify. You can decide, for instance, a month before the end of the tax year to top up your RA with as much as you want or make a lump-sum investment in a new RA and claim the full allowable deduction for the entire tax year. And, if you exceed the limit of 27.5% of your income that you may invest tax-free in an RA, SARS will not penalise you.
So, to utilise the excellent saving and tax benefits of an RA, act now before 28 February. For assistance or more information, you can contact Carrick at [email protected].
- Carrick Wealth is a registered South African financial services provider specialising in South African and international financial planning and integrated wealth management solutions. Carrick is also licensed in Zimbabwe, Botswana and Malawi, and holds three global licences in Mauritius. Carrick at all times maintains its independence with regard to product providers and asset managers, providing bespoke risk assessment, financial planning and other services to high net worth individuals (HNWI). Through our own qualified and experienced wealth specialists, as well as through partnerships with industry leaders in the fields of foreign exchange, tax, international property, offshore bank accounts, trusts, wills and estate planning, Carrick is able to provide the highest levels of service for your financial planning and investment requirements, both offshore and domestic. This communication is intended solely for information purposes for the use of designated recipients and is not an offer, recommendation or solicitation to transact. While it is based on information available to the public and from sources believed to be reliable, Carrick makes no representation that it is accurate or complete or that any returns indicated will be achieved.