February is budget speech month, Tax Year end, and Valentine’s Day month. In the financial services industry, February is also a significant month, as it signals the last month of the tax year. In the investment world, we commonly refer to February as RA Season. It presents the last chance to use the significant tax advantages that RAs offer.
In these tough economic times, there are still ways to use SARS to work for you. A retirement annuity and a tax-free savings plan are not only great ways to make retirement provision, but also effective ways to reduce your tax obligations, whether it be in contributions, or the earnings in your investments.
In 2016 the tax treatment for contributions to retirement fund products (RAs, pension and, provident funds) was simplified to offer all individuals the same combined benefit of making contributions towards retirement funding. Investors can currently deduct contributions of up to 27.5% of the bigger of their taxable income or remuneration for income tax purposes. This amount is limited to an annual overall maximum of R350 000. Taking advantage of this benefit annually can significantly reduce an individual’s income tax liability.
RAs are not the only measures by the government aimed at encouraging savings in South Africa. In 2015 Tax Free Savings Accounts (TFSA) were introduced, offering much the same tax benefits as RAs on all funds invested. In short, no tax is payable on the funds invested in these two products. Income from investment funds includes interest, dividends, rental income, and capital gains, both locally and internationally. Currently, investors may contribute a maximum of R36 000 per year into a TFSA, with a lifetime limit of R500 000. Please note that you should NOT contribute more than the maximum specified as this will have dire tax consequences. The R36 000 represents all your TFSA contributions in a tax year, and not contributions per product you may have with various providers.
So let’s look at some of the features and benefits of these two products:
Retirement Annuity (RA)
- Tax-deductible contributions as mentioned above
- Tax-friendly investment returns as mentioned above
- Flexible investment fund choices across all major asset classes and fund managers
- Portfolio construction to meet personal investment goals and risk appetites
- Transparent investment products offering competitive fees and flexibility
- Protection from creditors
- Excluded from estate duty
- Various options available at retirement (bearing in mind limited access to lump sum amounts and normal income tax on pension payments)
Tax-Free Savings Account (TFSA)
- Tax-friendly investment returns as mentioned above
- Flexible investment fund choices across all major asset classes and fund managers
- Portfolio construction to meet personal investment goals and risk appetites
- Transparent investment products offering competitive fees and flexibility
- Tax-free ad-hoc and regular withdrawals
- Complete tax-free liquidity at retirement
The time to invest is now! Most product providers request that any additional contributions or new investments reach them by 22 February to finalise investments before 28 February. Contributions may not be backdated to fall in a previous tax year.
Speak to your financial advisor, or contact Origin Financial Wealth at 086 118 7878 for assistance. Don’t delay, and make sure you “bridge the gap” in your retirement and tax planning this year.
