Tax Saving Tip – that boosts Retirement Funds

Tax Saving Tip – that boosts Retirement Funds

A Tax Saving Tip…that has the government’s blessing!

What if you knew of a tax saving tip that boosted your retirement savings?

Potential loss of financial independence causes much anxiety today. We are all expected to provide for our own retirement. There are fewer pensions or provident funds offering a guaranteed pension based on years of service. And many investors serve a short period with any one employer.

There is much conflicting information about how to invest. Damage is caused to portfolios by human mistakes related to fear and greed. For most South Africans, retiring on 80% of their salary at 65 is a pipe dream.

I will share a professional secret for free…

There is a great way to boost your retirement capital: a retirement annuity (RA). Forget about risky and expensive tax avoidance schemes touted to save you tax – my tax saving tip is a bargain and is guaranteed by the government.

  • Guaranteed tax deduction of up to 40%
  • Protection from capital gains tax
  • Protection from estate duty
  • Benefit payable for disability
  • Protection from insolvency
  • Protection for beneficiaries

Tax Saving Tip example

If you can save R1 000 a month, then your choice would be either R1 000 a month into unit trusts, or saving R1 600 a month in an RA. After the tax refund, the RA investment still costs less than R1 000 a month in cash. More importantly, and separate to the tax saving, your investment is actually worth 60% more, assuming you are on the top marginal rate of 40%.

But, because this tax saving tip is such a good deal, limits have been imposed. Individuals can contribute up to 15% of their earnings (excluding retirement funding earnings) to RAs tax-efficiently. It is important to note that if less than 15% of earnings are contributed to your RA, the deduction is lost forever. But overcontributions are carried forward to be used as deductions in future years. Your financial planner should calculate your capacity for tax-efficient contributions annually to ensure they are set at an appropriate level.

You can invest in any unit trust available in SA and use your offshore allowance to invest directly offshore. There are many unit trust-type RAs that provide full transparency and premium flexibility, and offer an effective future strategy for getting more bang for your buck.

I have also seen how an RA protects investors in the event of divorce, death, disability and insolvency. This is especially relevant if your minor children outlive you, as Section 37C of the Pension Funds Act permits professional trustees to care for your children’s financial well being.

Until recently, RAs were not available to individuals over the age of 70. However, as the number of elderly people needing or able to work increases, the government has noticed there is a need to grant these incentives to them too.

The great benefits of my tax saving tip come on condition that the investment funds are used responsibly when in retirement and as such the government has put certain restrictions on how the funds can be drawn from the investment.

Investors are allowed to retire from RAs from the age of 55 onwards, whether working or not.

Until the age of 55, the investor does not have access to the funds at all. When the investor retires, he or she can only take up to a third of the investment value in cash. The first R300 000 cash lump sum is tax-free and amounts thereafter are taxed on a tiered structure. The remaining investment value, being at least two-thirds, must be transferred to a living annuity.

While there is no tax payable on the transfer to the living annuity, the draw from the living annuity falls into the investor’s taxable income. There is no tax on the growth of the investment within the living annuity.

If you are prepared to take the risk of making your own investment decisions, may the returns be with you. But if, along with myriad other investors globally, you need help selecting an investment portfolio, here is another free tip: get appropriate, professional help fast.

Choose a qualified financial planner. If you cannot get a referral from a satisfied client, go to the website www.fpi.co.za. It is important to develop a plan that you and your spouse understand, and can afford, and that you stick to it.

Debbie Netto-Jonker CFP is founder of Netto Financial Services and was Financial Planner of the Year in 2001.

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