The end of the financial- and Tax year is fast approaching. That’s when Tito and his team close the books, present next year’s fiscal plan to parliament, and break the good, bad, or indifferent news to all of us by way of the annual budget speech.
It’s also the time of year when every South African can top-up two personal investment products on a tax-friendly basis before the curtain falls and the opportunity disappears for another 365 days.
Which two products are we talking about here?
You have until the end of February (literally the last day of the month) to top-up your:
- Retirement Annuity
- Tax-Free Savings Plan
A Retirement Annuity is a long-term investment plan you can take out to provide you with a pension from the day you decide to hang up your hat and call it a day at the office. You have to wait until you are 55 before you can withdraw from your Retirement Annuity, and you can only take a maximum of a third of your proceeds in cash. The other two thirds must provide you with a pension (monthly income) for the rest of your days.
What’s the deal with the tax-deductibility of Retirement Annuity contributions?
Our government wants fewer of its citizens to be reliant on a state pension, so they offer any South African, who contributes towards a Retirement Annuity, a tax break.
You can contribute up to 27.5% of your “pension funding” income towards a Retirement Annuity every year (capped at R350 000).
Let’s use an example to better illustrate the point:
Xolani earns R18 000 per month and works for a company that doesn’t have a pension or provident fund in place. What that means is that Xolani’s full salary of R18 000 per month is “pension funding”. He can contribute up to 27.5% of his income towards a Retirement Annuity, which means a maximum contribution of R4950 per month, and deduct this from his annual Income Tax.
Xolani decided to start a Retirement Annuity in March last year (the beginning of the tax year) and he has contributed R1000 each month towards his investment.
Over the year his contributions towards the Retirement Annuity tally up to R12 000.
The good news is that Xolani has the opportunity, before the end of the tax year, to still contribute a further R47 400, to maximise his full tax deduction.
How did we get to that amount?
The calculation is as follows:
- The maximum Xolani can contribute towards a Retirement Annuity, for tax deduction purposes, is R59 400 (27.5% of his income X 12)
- Xolani has already made R12 000 in contributions during the tax year (R1000 every month)
- That means he can still contribute a further R47 400 to maximise his tax benefit
If Xolani tops up his contributions to R59 400, he will be able to use the full amount as a deduction when filing his tax return, and that will lower his overall taxable income.
If you are looking to invest into your personal Retirement Annuity, but you already contribute towards a pension or provident fund at work, you need to work out how much of the 27,5% you are already using there.
A Tax-Free Savings Plan works slightly different to a Retirement Annuity.
Again, to encourage South Africans to save more, our government has introduced an incentive via a Tax-Free Savings Plan.
A Tax-Free Savings Plan allows you to invest R33 000 a year without the interest attracting any tax.
How does this differ from a regular savings account you may have?
Any interest-bearing account you have attracts tax on the interest (past a certain point). A Tax-Free Savings Plan doesn’t attract any tax on the interest.
Are there any catches? Nope, but just remember this:
There is a lifetime cap of R500 000 that each South African can invest in one of these plans. So, if we divide that by R33 000 a year, you could contribute towards a Tax-Free Savings Plan for 15 years.
That’s something to consider if you are using a Tax-Free Savings Plan to put away money for your kids (and the contract is in your child’s name). It’s an awesome thing to do for your child, but you might exhaust their R500K lifetime cap.
But then again, the government could change all of this down the line.
Back to an example:
Over and above his Retirement Annuity contributions, Xolani also wants to take advantage of a Tax-Free Savings Plan. Rather than committing to a monthly debit order, Xolani has decided to take his annual bonus and do the wise thing and invest it.
Xolani’s annual performance bonus was R36 000, but it doesn’t make any sense for him to invest all of it into a Tax-Free Savings Plan. The annual benefit is limited to R33 000, so that is the amount Xolani should contribute to get the max benefit of the investment.
Anything over and above the R33 000 allowance, will attract tax.
Most insurance and asset management companies offer a Tax-Free Savings Plan with a minimum monthly contribution of between R300 – R500 per month. You can choose which type of fund you want to invest into, depending on what you want to use the money for and your investment horizon (the amount of years you want to invest your money for).
Unlike a Retirement Annuity, which locks you in until a minimum age of 55, a Tax-Free Savings Plan doesn’t have any fixed terms. Your money is available to you whenever you need it. The flexibility of this investment is what makes this type of investment very appealing.
Don’t delay, top-up today.
Until next time.
The Wise About Life Team