Tax time: Take a look at retirement annuities
February is the final month of the financial year, and a good time to check that you have made the most of potential tax savings in the context of planning for your retirement.
This is particularly relevant to provisional tax payers, whose deadline for tax returns is February 28. A provisional taxpayer is anyone who receives income other than a regular salary, such as freelancers. If you haven’t already done so, now is the time to find those missing cash slips and liaise with your tax advisor, who needs sufficient time to prepare your tax return.
One of the easiest ways for many people to limit their tax outlay, and to invest for when they are no longer working, is a retirement annuity (RA). This might sound like an “old-school” personal finance product, but it ticks multiple financial boxes.
RAs are primarily intended to help people who are not members of a company pension or provident fund. This investment type is geared towards providing you with a pay cheque when you are no longer working. You can usually stop and start contributions as you wish.
Shafeeka Anthony, marketing manager of personal finance website JustMoney.co.za, says, “It’s always advisable to navigate tax season with the help of your financial planner and tax consultant, to access any benefits available for your particular financial situation. Given that many people’s work roles have altered radically in the past two years, they may be advised to consider an RA.”
The following are among the common RA questions that are answered on the JustMoney site:
How do I invest in an RA?
You can invest a lump sum, or a series of regular payments such as monthly contributions. You can allocate up 27.5% of your income to your RA up to a limit of R350,000 a year.
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Learn more about RAs as an investment option.
What’s the difference between an RA and a company pension plan?
RAs are often chosen by people who are self-employed, or who work for a company with no retirement scheme. However, if you are employed and changing jobs, and receive pension fund benefits when you leave the company, you can invest these in an RA.
How do I choose an RA?
RAs are available in two categories: Traditional and new-generation annuities. Traditional RAs are usually offered by life insurance companies, and new-generation RAs by asset management companies. Work with your financial advisor to compare benefits and costs before making a decision.
What are the tax benefits of an RA?
When you submit your tax return, you can claim back part of the money you contribute to an RA. Even better, if you invest the money that you claim back, you can further boost your retirement savings without any additional outlay.
You do pay tax when it’s time to withdraw funds from your RA; however, the first R500 000 that you withdraw is tax-free. Any subsequent lump sum withdrawals are taxed at incremental rates.
Find out more about the tax benefits of RAs.
A tax example: If you earn R400 000 per annum, and contribute 12% of your income to your retirement fund, your taxable income is R352 000. Your annual tax is R61 343 and you take home R290 654.
However, if you increase your retirement contributions to 14% of your income, your taxable income will be R344 000. Your annual tax will be R58 866 and your take-home pay will be R285 134. You save R5 520 in tax.
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JustMoney offers a handy income tax calculator here.
What happens when it’s time to draw from an RA?
You can access the funds from the age of 55, unless you are retiring due to ill health, or emigrating, or if your savings are less than R7 000. You can only withdraw one-third of your investment. The rest is used to buy an income-bearing product for retirement, such as a living or guaranteed life annuity. When you retire, you pay a lower tax rate than you did while you were working. Also, the interest and capital gains from your investment will not be taxed.
When is an RA unsuitable?
Your money is locked in until you reach the age of 55 years. It’s important to ensure that you also have savings and flexible investments, in case you need to access money for short-term emergencies. RAs may not be ideal if you are considering emigrating, given changes to the financial emigration process.
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Update yourself about financial emigration.
Does an RA cover my retirement?
An RA can be a great building block as you prepare for the day that you stop working. However, it needs to be part of a bigger plan that takes into account how long you can save for your retirement, how much you can put away, and the anticipated returns on your investments.
“It is never too early to think about how you can retire comfortably,” says Anthony. “This chapter of your life may last a lot longer than you expect – 25 years is no longer unusual – and you need to be prepared for it.
“Money problems can be a great source of stress. Taking steps early on to prepare for retirement can give you peace of mind and more independence when you are older.”
JustMoney is a personal finance website that provides readers with easy access to financial information, tools, services and products. It guides readers on their financial journey and enables them to make informed decisions.
See https://www.justmoney.co.za/
