By Bennie Wessels, 21 February 2017
But, they have to act before 28 February which marks the end of the 2016/2017 tax year - and all the tax benefits that go with it.
Sadly, Wessels says most individuals are unaware of the extent to which they can make the most of prevailing tax legislation and how to benefit from measures which government put in place to encourage a culture of saving; as well as to promote long-term sustainability and self-sufficiency.
The 2016 Taxation Laws Amendment Act enables everyone to contribute up to 27.5% (previously 15%) of their annual income in retirement savings products. This is capped across different retirement savings vehicles at R350 000 per tax year. The amount that you invest in retirement saving products can be deducted from your taxable income. In addition, RA growth is free of dividends tax, income tax on interest and capital gains tax.
Wessels believes it is a perfect opportunity for self-employed individuals without employer-sponsored retirement funds, such as business owners and professionals, to contribute more than the 15% cap which previously applied.
“So, if for any reason you were not aware of the new cap, you still have a chance to contribute more. The tax rebate you get from investing in an RA means that you defer more of your income tax to the period after retirement. This is a major benefit as your individual tax rate, rebates and allowable deductions will be more favourable in retirement than during your working years.” RA's are available to anyone: they do not need to be part of your company pension scheme.
TFSA's have been around for almost two years now, but a survey conducted by Sanlam amongst South Africans last year showed that surprisingly few people knew how these tax free benefits actually worked.
South Africans are allowed to invest up to R30 000 per year in TFSA's (up to a maximum of R500 000 over your lifetime). You invest now with after-tax money, while the dividend and/or interest on these accounts then accrue tax free. Sanlam’s survey indicated that as many as 37% were completely unaware of this type of investment, and that only 12% of respondents had already invested in TFSA's!
“The funds in your TFSA are available to you at any time and you do not pay tax on withdrawals. However, if you do draw money from these accounts, it will reduce your lifetime limit since you cannot replace money that you have withdrawn.” says Wessels.
RA's and TFSA's fulfil different objectives and need to be regarded in that light. In most cases, RA's provide the best tax effective vehicle for providing retirement savings. For long term discretionary saving, it would make sense to invest the first R30 000 per annum in a TFSA. Wessels suggests that you contact an accredited financial advisor or broker to help you decide on the product best suited to your individual needs and circumstances.