SHARES

Get your own back on the taxman

You have until the end of February to maximise your tax savings for this year.

As the end of the tax year approaches, now would be a good time to take advantage of the annual tax incentives that the South African Revenue Services (Sars) has put in place to help South Africans save.

Retirement annuities and tax-free savings investments are both tax-efficient saving vehicles but are very different to each other. We have compiled this short article which we hope will make it easier for you to select the right solution for you. 

The advantages of investing in a retirement annuity

  • Your investments into your retirement annuity are tax-deductible and your money is preserved for your retirement.
  • You may deduct the amount(s) you have invested from your annual income and lower your taxable income. You will pay less income tax.
  • Interest, dividends, and capital earned on the investment are tax-free.
  • There are further tax benefits when you retire. You are allowed to withdraw up to one-third of your investment as cash (the first R500 000 is tax-free but this includes all previous taxable lump sums from retirement products and applies once-off over your lifetime). The remaining amount must be transferred to a product that can provide you with an income in your retirement.
  • You can nominate your beneficiaries on your retirement annuity policy.

The advantages of investing in a tax-free savings investment

  • You can withdraw from your tax-free savings investments at any time.
  • Switching between underlying funds will not trigger tax.
  • There is no limit on the number of tax-free savings accounts you can have.

Differences between a retirement annuity and tax-free savings investments 

  Retirement annuity Tax-free savings investments
How much can I invest? You can invest any amount. Your investments are tax-deductible; however, this deduction is limited to 27.5% of the greater of your taxable income or remuneration, capped at R350 000 per tax year.

 

One can invest anything up to R36 000 per tax year, capped at R500 000 over your lifetime (across all service providers).
What if I invest more than the limits? Your tax benefit for investments in excess of the limits will be carried over to the following tax year until you’ve received the full amount.

 

A tax penalty of 40% will have to be paid on the amount you invest above the maximum (mentioned above).
When can I access my money? Any time after retirement; age 55. You will only be allowed to access your money earlier in certain circumstances.

 

At any time, however, your contribution limits do not change so you cannot re-contribute amounts you have already withdrawn. This makes your TFI more suited as a long-term investment.
Estate Planning Your money does not form part of your estate, only in certain circumstances. The trustees will have to decide who receives your money to ensure your financial dependants are taken care of, but you can nominate who you want to be considered. Upon death, your tax-free savings investments will form part of your estate and will be subjected to estate duty.

When looking at retirement annuity and tax-free savings investments, they have different objectives. It may not be an either/ or decision, but rather a question of using both for the purposes they were designed for.

It is of utmost importance to evaluate your entire portfolio in order to ensure that your investment choices are in line with your long-term investment plans.

You have until the end of February 2022 to maximise your tax savings for this year.

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Michael Haldane

Global & Local The Investment Experts

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