Tax-savvy ways to provide for retirement

By: Hymne Landman, Head of Momentum Wealth

Hymne Landman (Photos by Gallo Images/Media24/Luba Lesolle)

Tax is such an integral part of our lives that almost every financial decision your clients make has a tax implication.

Tax is a crucial consideration for any financial plan, but it can be complicated and confusing for clients. For many, it is a sensitive and personal subject they choose to avoid. With a few smart moves, especially when planning for retirement, they can benefit significantly from tax incentives and increase the probability of achieving their investment goals.

People should consider two effective ways to help them provide for retirement: a retirement annuityand a tax-free investment (also known as a tax-free savings account). If they are already using one or both, they can invest more into them, within limits, to make full use of the available tax opportunities.

Retirement annuity

Every tax year, a person can claim a tax deduction for the money invested in a retirement fund. To make the most of this deduction, clients can invest up to 27,5% of their taxable income or remuneration, whichever is higher, in a retirement fund.

They can do this whether they are self-employed or earning a salary, but they are not contributing the full amount to their employer’s retirement fund. The maximum deduction a person can claim in a tax year is R350 000.

In addition to the tax break clients get on the money they invest, they also enjoy tax-free growth in their retirement annuity – they don’t pay income tax, dividends tax or capital gains tax while the money grows.

But, some people say, when you retire you will pay tax on the income. This is true, but after age 65, clients could pay less tax because of lower income levels in retirement, higher rebates and higher deductions for medical expenses.

Clients who have not yet used the full tax deduction available to them for the tax year can make an additional lump sum payment to their retirement annuity before the tax year ends on 29 February 2024. To avoid the rush usually associated with retirement fund top-ups at the end of the tax year, people can consider increasing the amount they invest and making top-up payments earlier during the tax year, starting in March.

Tax-free investment

Although clients don’t get a tax deduction for money they invest in a tax-free investment, they still enjoy tax-free growth. And they won’t pay any tax on the proceeds when they decide to take money out of the investment.

Since the 2021 tax year, clients can invest up to R36 000 every tax year (R3 000 per month) in a tax-free investment, limited to R500 000 over their lifetime. Before this, the yearly limit was R33 000. The government may adjust these limits from time to time.

Optimise available tax incentives

Investing is personal, and every client’s circumstances are unique. The secret is to make sure that clients use these tax incentives optimally to suit their specific situation every year and consistently over time. By doing this, they can reduce the effect of tax on their financial plan and increase the growth potential of their investments.

Using the Retirement Annuity Option and the Flexible Tax-free Option from Momentum Wealth can help you implement investment solutions for your clients so that they can reap the full benefits of tax incentives available to all taxpayers every year on their journey to success.

Proposed two-pot system for retirement funds

The proposed two-pot retirement system is to encourage pre-retirement preservation and prevent people from accessing their retirement fund benefits when they leave employment, as well as give retirement fund members access to a part of their retirement fund benefits in case of emergencies or financial hardship. The proposed implementation date is 1 September 2024, but this may change. The new system means that we treat retirement savings before 1 September 2024 and after this date differently.

In essence, it splits a person’s retirement money in two and gives them access to some of it. The authorities are hoping this will help more people keep their retirement money for what it must be used for: To retire comfortably.

Speak to your Momentum consultant or visit to learn more.

Momentum Wealth (Pty) Ltd (FSP 657) is an authorised financial services provider and part of Momentum Metropolitan Life Limited, an authorised financial services (FSP6406) and registered credit (NCRCP173) provider.

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