We’re nearing the end of the year and it’s time to think tax! And this time, it’s happy tax planning. The taxman doesn’t give us many breaks and when he does, we should embrace them. In this article, we remind you to plan well in advance for your RA and Tax-Free savings account top-ups.
Triple the prize
There are many reasons to embrace Retirement Annuities (RA’s), the first being that contributions towards the funds are tax deductible. The retirement rules have changed, and you can now contribute up to 27.5% of your income to retirement funds (with an R 350 000 cap per year). This effectively reduces your marginal tax rate. Think of it as ‘freeing up cash’ to invest elsewhere.
The other tax advantage of RA’s is that there is no tax on the growth within the fund and you benefit from compound growth on additional growth, which is very significant in the long term. You also don’t pay Capital Gains Tax (CGT) when the underlying funds are rebalanced or when you transfer the funds to a Living or Life Annuity when you retire.
RA’s need to be Regulation 28 compliant which puts limits on the asset allocations within the funds to manage the underlying risk. The rules have recently been relaxed, and you may now invest up to 40% of the assets outside South Africa (30% internationally and 10% into Africa), which works well as a hedge against the Rand.
RA’s can also be used for effective estate planning. You don’t have to transfer the funds into a Living or Life annuity when you retire if you have other capital or source of income. RA’s do not form part of your estate and are not subject to the 20% estate duty. The funds are transferred directly to your beneficiaries and not subject to executor’s fees.
Win with flexibility
Tax-Free savings accounts also provide a tax break as similarly to RA’s there’s no tax on the growth within the fund. There’s an advantage in that you can access the funds before retirement for emergency expenses or if your investment strategy changes. Also, they are not subject to Regulation 28 which means that you can take a long-term approach and allocate a significant portion of the funds to local and offshore equity.
There’s an R 33 000 annual limit to contributions and a lifetime limit of R 500 000. There’s no point in exceeding these limits as the excess contributions are taxed at 40%.
A disadvantage of Tax-Free accounts from an estate planning perspective is that they do form part of your estate and attract estate duty, but if you nominate a beneficiary, you won’t have to pay executor’s fees.
Although Tax-Free accounts are meant for retirement, they are increasingly being used to invest for education. If you’re a parent, you can open an account in each of your child’s or grandchild’s name and align the asset allocation with the amount of time until the funds are needed for fees. Contributions to your children’s accounts are donations, but you can take advantage of the annual R 100 000 donations tax exemption for both you and your partner.
We usually recommend our clients to take the full advantage of the RA tax deduction, and then if they have additional funds to invest, to contribute to Tax-Free accounts.
Let’s get practical
We’re writing to you now to remind you of the benefits of retirement funds and to encourage you to be well prepared for the top-ups before the end of the financial year in February. The administration takes time and you may also need to withdraw funds from elsewhere for the top-ups.
If you sell money market unit trusts it can take from two to three days for the funds to reflect in your bank account, and from five to seven days for other unit trusts. Do check in with us before making any withdrawals as we need to consider the most appropriate funds to sell and the CGT implications.
There’s no time like the now
It’s very easy to get so swept up by work, family and other commitments that you forget to review your retirement contributions. Do take the time now to budget for the festive season and plan for the funds to be in your account and ready for collection well before February. Don’t miss out and get prepared to win!
If you’d like to discuss the above content do call me on 021 461 2429 or mail me at email@example.com