As the end of the South African tax year approaches, you have the opportunity to get a contribution to your retirement savings from the government. One way to do so is by topping up your retirement annuity (RA) or by investing in a new RA if you haven’t yet. Not only will you reduce your tax liability, but also boost your retirement savings and earn compounding tax-free returns (within the fund).
This is according to Floris Slabbert, director at Ecsponent Financial Services, a wholly-owned subsidiary of JSE-listed Ecsponent Limited, who encourages all South Africans to make use of this tax planning opportunity.
“Faced with the question of whether to pay taxes or save, everyone will agree that the latter is the better option. Thus, before the tax year ends, it is important to think about the incentives the government has put in place to encourage us to save,” says Slabbert.
SARS allows individuals to invest up to 27.5% of their annual taxable income in retirement funds, such as an RA, capped at R 350,000 per year. Slabbert explains that, “if your income amounts to R41,666 per month (R500 000 per annum in the current income tax year), your marginal tax rate is 36%. When you contribute 10% to your RA (R50 000 p.a.) you will receive a tax benefit in the form of a refund of R18 000 in the next year*.
Should you contribute R 25 000 as a lumpsum top-up in the same tax year, your contribution moves to 15%. That translates into a well-deserved R27 000 refund from SARS.
“Additionally,” Slabbert adds, “the compounded growth within a retirement fund or RA does not attract income tax, dividend tax or capital gains tax, which contributes further to your savings. If you contribute more than the capped amount, contributions in excess of the capped amounts in one year can also be carried over and deducted in the next year. And you will benefit at retirement when you will be able to withdraw some of your funds tax-free and benefit from the growth. Note that the one-third rule will apply*.
You have until 28 February to benefit from tax savings this tax year
If you haven’t yet contributed 27.5% of your taxable income to your retirement fund in this tax year, you have until 28 February, which is when the tax year ends, to top up your investment. You also still have time to invest in a new RA if you don’t already have one but want to make use of the tax benefit available to you.
Investing wisely is all about “Is the sacrifice worth the squeeze”?
When you make the choice to invest, you should also be savvy in choosing a product provider. Informed investors should compare the TIC (Total Investment Charge) and TER (Total Expense Ratio) when evaluating an investment product. The biggest effect in terms of cost is carried by the funds as they are allocated and managed continuously. Your trusted advisor should highlight these costs as these seemingly small percentages add up over time.
With Ecsponent’s product offering and costing approach, you will see the real costs and we will identify the difference to demonstrate where you are saving. E.g. Within the Ecsponent product range, you can save between 0.5% to 1% per annum on fees.
A 1% saving if you are retired and earning your income from a living annuity, can amount to a R 10 000 (or R 833.33 per month) difference in your income per year.
For those who are still contributing to an RA the same 1% saving can have a 25% higher retirement value. A 2013 paper from National Treasury supports this sentiment and states, “A regular saver who reduces the charges in his retirement account from 2.5% of assets each year to 0.5% of assets would receive a benefit 60% greater at retirement after 40 years.”
The true power and reason for investing is for you to work less and your money to work more. Keep your eye on the areas of investment you can control, like fees, how soon you get started, how you maximise your tax benefits and who you choose as your adviser. “Always make decisions with the help and guidance of an accredited financial advisor and Wealth Specialist, get the most out of your investments in 2019 by investing wisely and get the best returns on your smart investment choices.”
* All examples are for information purposes and should not be regarded as investment advice. Each investor’s situation is unique and requires individual analysis.