Richard Bray, 8 August 2018
What would you do with your refund? Fund your next holiday? Use it as a deposit on a new car, or simply continue to bolster your savings account? If you’re missing out this year, it’s not too late to start planning for a refund next year, though.
If you’re self-employed, or salaried but not yet contributing the full amount to your company’s retirement fund, a retirement annuity (RA) is one of the best ways to secure a tax refund. For example, if your total annual income in this tax year is R250 000 and you contribute 15% of that to an RA in the 2018/19 tax year, you’ll be saving R9 750 of tax (assuming no contribution to an employer’s fund). For those earning R500 000, the saving is R27 000! (We’ve created an infographic for you to further explore your potential tax refund.)
When you file your tax return, you can deduct your contributions to a retirement annuity from your taxable income, up to a specified limit: 27.5% of your total annual income per year (with a R350 000 contribution cap per year). This limit applies to your employer’s retirement fund and your RA combined. This means that if you have not yet reached your 27.5% limit by contributing every month to your employer’s fund, you can pay less tax by also making a contribution to an RA.
Much has been said about government’s drive to get South Africans to save more – hence their introduction of tax-free savings accounts in 2015. But an RA is the original tax-efficient savings product; all the investment returns of an RA are tax-free while your money stays in the fund. That means all dividends, interest and capital growth gained before retirement are tax-free. Also, at retirement from the RA, the lump sum benefit is tax-free up to R500 000.
While there is no tax payable before retirement, the potential tax after retirement needs to be kept in mind. The annuity you’ll draw in retirement will be taxed according to the SARS tables for personal income tax - your current salary or business income is also taxed according to these. That is why we prefer to call an RA a way to reduce and postpone tax; it is not entirely tax-free.
You are not allowed to make any withdrawals from an RA before retirement, which is set by law as age 55 at the earliest. There are exceptions, though, for example earlier retirement due to ill health and when you officially emigrate from South Africa.
At retirement you are allowed to take a cash lump sum of no more than one-third of the total value of your RA at retirement. With the remaining two-thirds you need to buy an annuity income.
Other than all the tax benefits mentioned above, more importantly, you are increasing the savings pot and financial security available to you at retirement. In addition, under current legislation your retirement savings are protected from creditors and your RA is not included in your estate upon death.
Your bonus forms part of your income. So, if you’ve not already asked your employer’s payroll division to deduct the full 27.5% from your bonus and put it in your company’s retirement fund, then you have a gap to invest up to 27.5% of your bonus in your personal RA. You may be pleasantly surprised by the size of your tax refund in the subsequent year.
It is possible to open an account within a few days. Discuss the options with your financial planner and make sure you understand the total costs involved, as well as the risks attached to the underlying funds in your RA.
That dream holiday could be a reality by next year around this time - compliments of the tax man. And your retirement savings pot will be stronger for it too. It is possible to save for your golden years and maybe even reach gold flyer status along the way – with an RA.