There are only two and a half weeks left in this fiscal year and we would like to remind you to take advantage of the annual tax incentives that the South African Revenue Service (SARS) has put in place to help South Africans save.
Retirement annuities and tax-free savings investments are perfect opportunities to maximize your tax savings. Below are the benefits and differences between these two tax-efficient savings vehicles to help you choose the solution that’s right for you. You don’t have either, don’t worry, we at Global and Local can help.
The advantages of investing in a retirement annuity
- Your contributions to your retirement pension are tax deductible and your money is preserved for your retirement.
- You can deduct the amount(s) you contributed from your annual income and reduce your taxable income, which means you pay less income tax now.
- Interest, dividends and capital earned on the investment are tax exempt.
- There are other tax advantages when you retire. You are allowed to withdraw up to a third of your investment in cash (the first R500,000 is tax free, but this includes any previous taxable lump sums from pension products and applies once in your lifetime ). The remaining amount must be transferred to a product that can provide you with an income in retirement.
- You can designate beneficiaries of your retirement pension.
The benefits of investing in a Tax Free Savings Investment
- You can withdraw from your savings investments tax-free at any time.
- Interest, dividends and capital earned on the investment are tax exempt.
- The transfer between the underlying funds will not trigger tax.
- You can have as many tax-free savings accounts as you want, up to a limit of R36,000 per tax year for all accounts.
Differences between a retirement annuity and tax-free savings investments
| Retirement pension | Tax Free Savings Investment | |
| HHow much can I invest? | You can invest any amount. Your investments are tax deductible; however, this deduction is limited to 27.5% of the greater of your taxable income or remuneration, capped at R350,000 per tax year. | One can invest anything up to R36,000 per tax year, capped at R500,000 over your lifetime (on all service providers). |
| What if I invest more than the limits? | Your tax benefit for over-limit investments will carry over to the next tax year until you have received the full amount. | A tax penalty of 40% will have to be paid on the amount you invest above the maximum (mentioned above). |
| When can I access my money? | At any time after retirement; 55 years. You will only be allowed to access your money sooner under certain circumstances. | At any time, however, your contribution limits do not change, so you cannot re-contribute amounts you have already withdrawn. This makes your TFI more suitable as a long-term investment. |
| Estate planning | The proceeds of a retirement pension are not part of your estate. Trustees will need to decide who will receive your money to ensure that your financial dependents are taken care of, but you can designate who you want to be taken care of. | Upon death, your Tax Free Savings Investment will become part of your estate and may be subject to inheritance tax. |
When it comes to retirement annuities and tax-free savings investments, they have different purposes. It may not be a decision, but rather a matter of using both for the purposes for which they were designed.
It is of the utmost importance to evaluate your entire portfolio to ensure that your decisions align with your long-term investment plans.
If you have not yet reached these limits, you have until the end of February 2023 to maximize your tax savings for this year. Michael Haldane and his team at Global & Local The Investment Experts are ready and waiting to help
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