Tax, tax breaks and taxing thoughts about becoming older

You may think that this blog post does not apply to you. Your company has a pension scheme – a good one, you are told – and you have savings in the bank. However, people are living much longer these days – generally 30 years past retirement. And life keeps getting more expensive – inflation is outpacing the interest you receive on the savings in your bank account. In fact, 94% of those who retire today will have to drop their standard of living.

So yes. Ideally you should have started with your first pay check – saving at least 17% of it. Every month. But no. Like most people you probably did not and now you are in your 40s, life is becoming real, and you may be suppressing an impending sense of all-consuming panic. Fear not (too much!) come and see me, your trusty Financial Advisor. I have seen and heard it all over the years and will not judge. The good news is that even the South African Revenue Service is on your side on this one!

SARS and retirement annuities

Indeed, SARS wants to give you a tax break, if you make good on your promise to save to make sure your ‘Golden Years’ are indeed your ‘Golden Years’. This is best done through a retirement annuity, also referred to as an RA. The value of a retirement annuity accrues, untouched, over the years so that when you reach the age of 55 you can have the option of receiving a lump sum of up to a third of the value of the annuity (the rest will be reinvested to secure ongoing income for later.) Incidentally, the first R500 000 of that lump sum is tax free as well… You could choose take the full benefit as a cash lump sum if the pre-tax value of your benefit, on the date of retirement, is equal to or less than R247 500.

But you are not yet 55 and concerned about your tax savings TODAY

How much of a rebate are you entitled to, right now? 27.5% of your taxable income. How do you know what your taxable income is? It is your gross salary minus your allowed expenses. These are expenses that will help secure or add to your income. It includes, amongst other things, a portion of your medical aid payments, certain tax free investment options, and your pension or provident fund contributions. As a side note, do come and see me so that we can check that all your portfolio options are tax efficient.

However, there is a ceiling of sorts. In terms of a tax rebate, your contributions may not exceed R350 000 per annum. It is not that you may not put away a greater sum of money for your latter years, it just means that SARS will only pay out the rebate to the value of 27.5% in any given year. The rest is carried over to the next year. You may decide to invest less the following year, but still claim the amount due to you from the previous year, or you can let it accumulate over the years. By the time you then do want to retire, SARS will have to pay out all the monies due to you upon your request.

The good news does not end there. When the money that make up your tax deductions is subtracted from your remuneration, your taxable income threshold may be lowered, which means you may be taxed at a lower tax bracket.

So what is an annuity and how does it work?

Since these are linked to unit trust investments, it allows for your relatively small investment of money to be pooled together with that of others in a collective investment. This gives you exposure to a wider range of underlying investments and risk can be spread as different investments behave differently.

You can start off with a small monthly amount deposited via a debit order or you can decide to kick start the process with a larger lump sum. To this you can then add smaller contributions or another lump sum should the opportunity arise.

Why, in 30 years of operation, NFS has never used an insurance company for RA

You might have seen advertisements in the media that promise peace of mind through retirement annuities for ‘as little as R300 per month’. What these companies do not tell you upfront is that they charge exorbitant cancellation fees when you are unable to continue paying, should you lose your job for instance. In fact, we have evidence of companies that hit people with penalties as high as 48%! It is illegal, but companies still do so and get away with it, because the public knows no better.

This is one more reason why it makes sense to speak to a reputable financial advisor – an independent one that makes giving advice their business, not selling you just another policy.

So what does NFS do then?

We place your money directly on a reputable investment platform, which we monitor continuously. Should, for some reason, you need to cancel the investment before it matures, you will be faced with a penalty of no more than 5%.

Let us show you some sums

Let us say you earned a salary of R300 000 in the 2019/2020 tax year. Business went well and you earned an additional bonus of R100 000. Being conscientious, you invested R50 000 in a retirement annuity. Remember, as of the 1st of March 2016, the maximum allowable deduction will be determined as the greater of:

  • 27.5% of taxable income, or
  • 27.5% of remuneration
  • Limited to R350 000 per year

Your taxable income is your remuneration (a total of R400 000). 27.5% of R400 000 is R110 000. This is therefore less than the annual limit of R350 000. You therefore will be able to claim your full contribution of R50 000 as a deduction for the 2019/2020 tax year.

What if you earned (and saved) more?

Perhaps you earned R900 000 in the 2019/2020 tax year. You are very good at what you do and earned commission of R400 000. You decided to invest R370 000 in a retirement annuity. In this instance, your taxable income is your remuneration (a total of R1 300 000).

27.5% of R1 300 000 is R357 500. This happens to be greater than the annual limit of R350 000. The difference between the actual contribution made (R370 000) and the maximum deduction allowed (R350 000) is R20 000. This last amount will be carried over to the next tax year and will be seen as a ‘current’ contribution made in that year.

Final words

It is vital for your financial health to make use of this opportunity and to do so in time to avoid unnecessary penalties. The tax season is upon us and closes on the 29th of February, 2020. Do not let this leap year catch you falling short! Allow us to help you now, so that you are not caught with outstanding issues at the end of February.

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