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Paying tax is a necessary obligation that ensures that our government is able to deliver essential services to the people of our country. There are legitimate ways for you to pay less tax while planning for your future retirement. Investing in a retirement annuity is a practical way to save, get tax relief and provide for your retirement.
A retirement annuity delivers a certain level of tax relief on your contributions. You won’t pay any tax on the interest, dividends or capital gains that accumulate in your retirement annuity. However, retirement investors pay tax on the lump sum and annuity received on retirement.
Up to R500 000 of the lump sum may be tax-free. The rest is taxed according to a preferential tax table. While the annuity is subject to tax at the individual’s marginal tax rate, by retirement, the marginal tax rate is normally lower than the tax rate while working.
Four tax benefits of a Retirement Annuity
1. Reap the benefits of compound growth
When investing over the long term, investment capital will start to experience additional growth from the investment returns. The longer the investment period, the more robust the earnings will be. As this compound growth takes place within the retirement annuity fund, all the growth will be tax-free.
2. Take advantage of the protection offered by Retirement Annuity legislation
Many South Africans are tempted to cash in their savings before they reach retirement. However, this could be a mistake as it could trigger a taxable event and erode your retirement savings significantly.
Investors in a retirement annuity cannot access their money until retirement and neither can their creditors. This gives you the peace of mind that your retirement savings will be set aside for your long-term retirement goals.
3. Give your dependants the financial support they need
Should you pass away before retirement, the Retirement Annuity cash benefits (excluding non-deductible contributions) won’t form part of your estate. Your dependants or nominees will have access to the money to help them maintain their lifestyles.
The trustees of the Retirement Annuity Fund will make a determination as to who’s entitled to the benefits and only thereafter will the benefits be paid to dependants. If the death benefit is taken out as a lump sum, it will be taxable in the hands of the deceased. If the benefit is taken out as an annuity, then it will be taxable in the hands of the dependants.
4. Deduct contributions from income tax due at the end of the year
It’s important to note that retirement annuity contributions and any other contributions to other retirement funds will be combined to determine whether the contributions fall within the deductible limits. Investors are able to claim a deduction for their contributions up to 27,5% of the greater of compensation or taxable income, subject to a deductible cap of R350 000 per annum.
If you provide proof of your contributions to your employer, your employer will be able to take your contributions into account every month so you will pay less tax every month. If you’re self–employed, you can always get some tax back at the end of the tax year.
Financial advice is essential to take advantage of these tax benefits
Investors are faced with many challenging financial decisions when reaching retirement. Making the right decisions can make a significant impact on the size of their retirement nest egg. It is important to understand all the options available, especially when it comes to taking full advantage of tax benefits.
Don't leave your future to chance. Building a good relationship with SARS is the best way to ensure that you live the retirement of your dreams. Speak to a financial adviser today to find out how best to structure your retirement savings so that you can get the most value out of your money.
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