In the aftermath of the past 12 months, setting New Year’s resolutions feel futile. Why would you, after all, make any plans when the pandemic could change the business and social rules tomorrow?
If you feel this way, perhaps consider a resolution that will require little effort and will, over time, build momentum that can help you achieve other goals.
I am of course talking about saving for retirement. That may not sound like a very exciting New Year’s resolution, until you realise how much money you can save and earn by using all the tax benefits available to you, especially when saving in retirement annuities (RAs).
RAs are tax-efficient investment vehicles that allow you to effectively save for your retirement, while still being able to actively manage your money. Every rand that you save in an RA every year is allowed as a tax deduction and allowed to grow tax-free until your retirement, making this one of the best investments you will ever make. (The deduction is calculated as 27.5% of your taxable income up to a maximum of R350 000 per annum).
It is best explained by an example: If your marginal tax rate is 31%, you will receive 31c from Sars for every R1 you invest in your retirement fund. That means you get R1 invested for your future and only contribute 69c for it. Using a simple equation (31/69*100) it means an effective return on investment of 44.93% guaranteed.
It also means that the higher your marginal tax rate, the bigger your guaranteed return.
See table below:
Investment return obtained by the tax benefit at contribution
|Your marginal tax rate||Guaranteed investment return|
If you approach this from a different angle, it means that your taxable income decreases by the amount that you save for retirement. This means that you could move yourself into a lower tax bracket by saving for retirement, which means that you not only save the tax on the money you put in your RA, but you could be paying less tax on all your other income.
For the money in your RA, it is not only the tax saving that makes it such a sweet investment. An RA is a fantastic investment vehicle for many other reasons:
- Money in your RA does not form part of your estate and no estate duty tax is payable on the investment or the growth on the investment.
- The investment and growth is protected from creditors
- You pay no tax on the dividends and growth that you receive on the money that is invested in the RA.
By placing a retirement annuity at the heart of your tax-efficient savings and retirement plan, you can outpace any other investment and save tax on all your income (even when subject to Regulation 28 requirement). You should contact your certified financial planner (CFP®) to add other tax-smart investments, such as a tax-free savings account or endowment, to your financial plan to not only save as much tax as possible but accelerate the growth of your investments by saving on tax and investing in the right financial instruments.
As always, the best advice is to work closely with a fully independent CFP® professional who is a member of the Financial Planning Institute of South Africa (FPI), to make every cent count and finally create a new year’s resolution that is worth keeping.