By Roenica Tyson, 27 February 2017
A retirement annuity, or RA, is an ideal vehicle for this purpose. Investors can receive tax benefits by investing up to 27.5% of the higher of their taxable income or remuneration into retirement savings products (RAs, pension and/or provident funds). The tax-deductible amount is capped at R350 000 per year. Re-investing the tax saving can significantly increase the final value of your investment. In addition, while saving in an RA, you don’t pay tax on any interest or dividends, and no capital gains tax is applicable on the growth in the investment.
Depending on the investment platform, investors can select from a wide choice of underlying investments in their RA, including risk-profiled investment funds, local or foreign funds, actively managed or passive index-tracking funds, single manager or multi-manager funds, as well as an individual share portfolio or exchange traded funds. The maximum exposure to asset classes, however, is governed by Regulation 28 of the Pension Funds Act. Current limits include a 75% maximum exposure to equities, 25% to property and 25% to offshore investments, although an extra 5% can be invested in Africa.
Investors have until the end of February each year to take advantage of the tax benefits for that particular tax year, by adding a lump sum to their RAs.
The benefits of Tax-free Savings Accounts (TFSAs) are well-known by now – no tax on interest or dividends received, and no capital gains tax or tax on funds withdrawn.
Making a TFSA work for you to your best advantage, and within the context of your overall investment portfolio, requires some consideration and professional financial advice in this regard is invaluable.
It will take investors 15 years to reach the maximum lifetime contribution limit of R500 000 to their TFSA. While you can access the money at any time, any amount withdrawn will be regarded as a further contribution (towards your lifetime contribution limit) when re-invested in the TFSA. Given this negative impact of withdrawals on your contribution limit, your TFSA should be viewed as more of a long-term investment; there are other investment vehicles more suited to short-term savings or emergency funds.
Other important considerations involve weighing up contributions into a TFSA versus a regular investment plan, as well as into a TFSA versus a retirement annuity.
If an investor is currently investing, for example, R5 000 a month into a discretionary savings plan, it will make financial sense to split the investment, i.e. invest R2 500 into the discretionary savings plan and R2 500 into a tax-free savings plan in order to utilise the tax benefits of the TFSA.
Weighing up contributions to a retirement annuity (RA) versus a tax-free savings account is a slightly more complex decision. Together with your adviser, you need to look at the advantages and disadvantages from a tax perspective. While for both options the growth within the product is free of dividends tax, income tax on interest and capital gains tax, only contributions into an RA are tax-deductible. The TFSA will, however, offer more flexibility in terms of access to money, whereas RA funds can only be accessed from age 55 upwards. Lump sum withdrawals from RAs are only tax free up to certain limits, while there is no tax when withdrawing from a TFSA.
However, it needn’t necessarily be an ‘either/or’ choice. Using the two in combination can deliver superior results.
Parents can also open tax-free savings plans for their children, i.e. a family of four, with two children, can save up to R120 000 tax free (in the 2016 tax year). From 1 March 2017, the limit increases to R33 000 per individual per year, therefore a family of four can invest up to R132 000 per year. This is an ideal way to save for a child’s education and can also help to cultivate a savings ethic from a young age.
Note that when investing on behalf of your children or transferring an investment to them, donations tax of 20% of the amount donated is payable. Investors, however, have an annual donations tax exemption of R100 000.
Investors are encouraged to consult with a qualified financial adviser to ensure their investment portfolio is in line with their personal circumstances and risk profile.