Time to start balancing retirement annuities with 12Js

Given the significant upfront and back-end tax benefits associated with RAs, it’s no wonder that wealth managers have for many years encouraged clients to max-out their RA contributions each year.

With a sharp increase in 12J investments, as an additional tax shielding mechanism, wealth managers have started to combine 12J investments with RA investments, to further reduce their clients’ tax liabilities (in some cases to zero).

An excellent example is one introduced to me by seasoned wealth manager Craig Gradidge of Gradidge-Mahura Investments who explained to me that: “Depending on various personal circumstances of each client, I would look to invest R800,000 in a Section 12J investment. This would allow the client to claim a refund of approximately R360,000 from Sars. I would then allocate R350,000 into an RA, which will allow the client to claim a refund of approximately R157,000.

“By balancing an RA and a 12J investment, the net effect is that the client’s asset of R800,000 would have grown to R1 317,000 just through the refunds paid by Sars.”

The combination of investing in both RAs and 12J investments is not limited to the tax benefit, wealth managers can balance their clients’ investments to ensure that funds invested are accessible before the age of 55. This is as a result of 12J investments only having to be held for five years in order to enjoy the full tax benefit. 12J investments also provide dividend income streams through the duration of the investment. This careful balancing mechanism can create liquidity prior to retirement.

In addition, the 12J investments market is extremely diverse with taxpayers having the option of investing in high growth riskier investments, midtier conservative investments and low-risk capital preservation investments. These options allow wealth managers to balance their clients’ risk profiles together with their RA contributions.

Unlike RAs, 12J investments are not vanilla investments and have historically been notorious for charging taxpayers high performance fees and in some cases, have failed to invest investors’ capital timeously.

The market has since developed, with new alternative 12J investments starting to gain in popularity, allowing wealth managers to diversify their clients’ exposures across a number of 12J investments.

Even though the market has started to mature, taxpayers would be well advised to consult their wealth manager before making an investment.

From a tax planning perspective, wealth managers and taxpayers should understand the intricacies of 12J investments to minimise the amount of tax payable by their clients.

Jonty Sacks is a partner at Jaltech Fund Managers

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