Why tax is an important part of your clients’ financial planning

By: Pierre Jean Marais, Retail Marketing at Momentum Investments

Pierre Jean Marais, Retail Marketing at Momentum Investments
Pierre Jean Marais, Retail Marketing at Momentum Investments

Almost every financial decision your clients make has a tax implication.

Just as fuel efficiency is one of the important aspects to consider when buying a car, so should tax be an important consideration for any financial plan. With smart tax planning, your clients can get to their destination with help from the taxman.

Tax can be complicated and confusing, and for most people, it is a sensitive and personal subject they choose to avoid. But with a few smart moves, especially when planning for retirement, they can benefit significantly from tax incentives and increase the probability of them achieving their investment goals.

They can use two effective ways to provide for their retirement: a retirement annuity and 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 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 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, a limit that only kicks in when earning more than R1.27 million a year.

If clients have not yet used the full tax deduction available to them for the tax year, they can make an additional lump sum payment to their retirement annuity before the tax year ends on 28 February 2022.

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 is growing.

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

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. 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 according to 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 on the Momentum Wealth local platform 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.

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

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