It’s nearly the end of the tax year, but you still have time to reduce your tax bill. Everyone needs to save for retirement and it’s one of the few opportunities we have to pay less tax, writes Mark Lapedus: Head of Product Development

MAXIMISE YOUR TAX BREAK
Each year, you’ll get back the tax paid on any money saved in a retirement product, subject to certain limits. 
This includes investments into any pension or provident fund, as well as a retirement annuity (RA). The first two products are usually provided by your employer and the tax will be calculated as part of your salary. 

A RA is usually in addition to these savings and done privately. For self-employed individuals or where a company doesn’t provide retirement benefits, this would be their main source of retirement savings.

This means you invest with money that’s already been taxed, but the good news is that you’ll be able to get the tax you paid on it back as a rebate. It’s best to discuss your tax situation with a tax expert, as we often miss out on opportunities simply because we didn’t know about them.

Apart from paying less income tax, a RA is also exempt from all investment taxes, including tax on interest income, dividends tax and capital gains tax. Over a period of 25 years, the savings on those taxes increase your final retirement benefit by at least one-third.

The combination of the income tax saving with the tax saved within the fund could effectively double the retirement benefit, relative to other taxable investment products.

WHY IS 29 FEBRUARY SUCH AN IMPORTANT DATE?
For us, 31 December is the day we bid farewell to the old year and welcome in the new one. For the SA Revenue Service, however, the year actually ends on a different date: the current tax year ends on 29 February and the new one begins on 1 March. 

If you’re saving for your retirement, be sure to maximise this tax benefit each year before 29 February. There’s no grace period and no exceptions.

What does this mean for you?

• If you invest in your RA, pension or provident fund before 29 February, it will still form part of the current tax year. 
• If you invest on 1 March or later, it will form part of the next tax year.

It’s important to remember that you’ll still get the tax benefit for saving for your retirement – the only difference is which tax period it will fall under.

Let’s look at an example: John realises that he can still make a R10 000 contribution to his RA and get the tax benefit on this.

If he makes the payment so that it reflects on his policy before 29 February, this will form part of his tax return for this year.

If he forgets and makes the payments so that it only reflects on his policy on or after 1 March, the money will only form part of his next tax return. This means he’ll have lost out on the tax benefit he could have obtained in the current tax year and he won’t receive a tax rebate.

COMPOUND INTEREST IS YOUR FRIEND
The earlier you start to save, the more you can utilise the power of compound interest. So the more time you spend saving, the more the growth on your investment will give you growth. You’ll get growth on your growth. Thinking along these lines, the more time you have saving, the more growth you’ll earn – and the more growth you’ll earn on that growth.

Remember the “rule of 72”. This means that if you get just over 10% growth per annum, your money will double in seven years. (72 divided by the interest rate gives you the number of years before the money doubles). So the longer you have money invested, the more it will grow for you. You can use this to do a quick mental calculation of approximately what to expect from an amount saved for a long period.

A financial plan should be reviewed each year – and now’s a good time to meet your financial advisor to ensure your financial plan is in line with tax changes and your personal circumstances.

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