It’s almost the end of the tax year, and now is the time to make use of a great government incentive that encourages people to save for their retirement in a tax-efficient retirement annuity.
SARS allows a tax deduction for contributions to a Retirement Annuity which can reduce the tax that you pay at the end of February.
Here’s how it works:
Money that you put into a retirement annuity is deducted from your taxable income. So, for example, if you earn R500,000 a year, and contribute R50,000 to an RA during the year, you’re only taxed on R450,000. This will reduce your tax bill by R18 000 – essentially, a free R18 000 to your retirement savings.
However, there are limits. A maximum of 27.5% of your remuneration or taxable income (whichever is higher), and no more than R350,000, is tax deductible in a tax year. You can contribute more to your RA but after you’ve reached these limits, your contributions are rolled forward to and automatically deducted in future years. Also, the limit applies to all your retirement savings combined (including retirement annuities, pension funds and provident funds). So if you contributed the maximum of R350,000 in total, and R150,000 went to a pension fund at work, only R200,000 of RA contributions would be deductible.
Here are some benefits of contributing to a RA now and in the long run:
- Growth in your RA is exempt from dividends tax, income tax on interest, and capital gains tax.
- You will be paying less tax now, as your RA contributions will be made from earnings on which you have not yet paid tax.
- At retirement you will receive further favourable tax benefits such as the tax-free transfer into a living annuity, where the growth is also tax-free
- You get to increase your tax-free portion: If your contributions are above the maximum rate, these can be carried over to the next tax year. If they’re unused over the total contribution period, they can be offset at retirement to increase the tax-free portion of the lump sum you are paid out when you retire.
- RAs help to instill financial discipline: Retirement annuities are great products if you suspect that you need some help to be a disciplined saver. This is because you may not access your retirement annuity savings until the age of 55. This removes the temptation to dip into or deplete your savings during your working lifetime.
- They help to protect your family in the event of bankruptcy: The cash benefit from a retirement annuity is not included as part of your estate. This means that if you die and you are insolvent at the time of death, your family will still receive the cash benefit from your retirement annuity, rather than the money going to your creditors.
- Your investment can enjoy tax-free growth: You do not pay any tax on the investment returns during the period between taking out your annuity and your retirement date.
These are some of the reasons why one can reap long-lasting rewards from investing in a savings vehicle like a retirement annuity.
This article is meant for information purposes only and should not be taken as financial advice. For tailored financial advice, please contact us: www.cloudworxsa.com.