It is that time of the year when savvy investors ensure that they have contributed as much as they can to their tax-free investment and retirement annuities. They know that every taxpayer is entitled to structure their financial affairs in such a way as to limit the amount of tax payable to the South African Government. They recognise that, by not investing in a retirement annuity or tax-free investment, they may end up paying unnecessary tax.
Every South African can invest up to R 3,000 per month (R 36,000 per annum) in a tax-free investment, with a lifetime contribution limit of R 500,000. The benefit of this type of investment is that all growth is entirely free of interest, dividends and capital gains tax. Although a contribution to a tax-free investment is not tax-deductible, it is an excellent way to supplement retirement savings and save towards long-term goals without the growth of your investment being subject to tax.
Savvy investors also understand the benefit of contributing to retirement funds such as pension or provident funds and retirement annuities. The Government allows you to contribute up to 27.5% of the greater of your taxable income or total remuneration, to a maximum of R 350,000 per annum.
A retirement annuity is an excellent tax-effective way of saving for your retirement, either as a stand-alone retirement investment or as a means of supplementing your existing pension or provident fund. Most employer-sponsored pension or provident funds do not usually provide for the maximum contribution of 27.5% of total income. This means that there is often scope for you to make an additional contribution to a private retirement annuity if you can afford to do so.
A significant benefit of investing in a retirement annuity is that the investment growth component is not subject to income tax, capital gains tax or dividends tax. The proceeds are also not subject to executor’s fees or estate duty in the event of your death. If you encounter financial difficulties, the funds invested in a retirement annuity would be protected and could not be attached by a creditor.
A further way to save tax is to donate to a non-profit organisation such as a charity or educational institution registered to issue section 18a tax certificates. Qualifying donations are tax-deductible to a maximum of 10% of your taxable income. Not all non-profit organisations and charities can issue these certificates, so it is vital to be aware that some donations you make may not be tax-deductible.
To qualify for these tax-saving opportunities in the 2021-22 tax year, you must finalise your contributions invest well before the end of February 2022.
Not all tax-free investments and retirement annuity products offer the same benefits. It would be to your advantage to discuss your needs with an experienced Certified Financial Planner® who will recommend a solution that will meet your requirements.
Rands and Sense is a monthly column written by Ross Marriner, a CERTIFIED FINANCIAL PLANNER® with PSG Wealth. His Financial Planning Office number is 046 622 2891