Many people are feeling the pinch these days due to the spiralling cost of living and muted investment returns. It is essential for you to use every chance you have to save tax during these challenging times. You still have until the end of February to take advantage of some fantastic tax-saving opportunities.
One option is to contribute to a retirement annuity (RA). This is an excellent tax-effective way of saving for your retirement as a stand-alone retirement investment or as a means of supplementing your existing pension or provident fund. The Government allows you to contribute up to 27.5% of the greater of your taxable income or remuneration, to a maximum of R 350,000 per annum.
A huge benefit of investing in a retirement annuity is that the investment growth component is not subject to income tax, capital gains tax or dividends tax. The proceeds are also not subject to executor’s fees or estate duty in the event of your death. If you were to encounter financial difficulties, the funds invested in a retirement annuity would be protected and could not be attached by a creditor.
A second tax-effective way of investing is through a tax-free investment plan (TFIP). You are permitted to invest up to R 33,000 per annum (R 2,750 per month) into a TFIP. This is a great way to supplement your retirement savings and to save towards long-term goals. As with an RA, the investment growth is not subject to income tax, capital gains tax or dividends tax. Where the Pension Funds Act imposes certain restrictions for retirement annuity investments, there are very few restrictions when it comes to investing in a TFIP.
The difference between an RA and a TFIP is that contributions to your RA are tax deductible whereas they are not deductible in the case of a TFIP. Should you wish to access your money for any reason, the investment value of your TFIP is immediately available and can be accessed as a tax-free lump sum. This is not the case for an RA, where only the first one-third is available as a lump sum (the first R 500,000 being tax-free), while the remainder must be used to purchase an annuity.
As a taxpayer you have every right to structure your financial affairs to your advantage and in the most tax-efficient way possible. Investing in a TFIP and RA is an excellent way to ultimately reduce the total amount of tax that you are obliged to pay.
If you do plan to invest in a TFIP or RA in order to reduce the amount of tax you will have to pay in the 2018/9 tax year, you have until the end of February 2019 to do so. If you miss this deadline, you may end up paying more tax than you need to. An experienced financial planner will be able to assist you to calculate your tax savings if you were to invest in an RA and or TFIP and provide you with sound advice on suitable investment strategies, in line with your overall financial plan.
- 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