Re­tire­ment an­nu­ity on steroids

Finweek English Edition - - INSIDE - BY SCHALK LOUW Port­fo­lio Manager at PSG Wealth

Satur­day, 28 Fe­bru­ary, doesn’t only mark an im­por­tant date for com­pa­nies whose fi­nan­cial year-end comes to a close, but it also marks an im­por­tant date for per­sonal tax­pay­ers. Be­fore I lose read­ers due to the fact that they de­spise hav­ing to pay any­thing that ar­rives in an en­ve­lope with a win­dow, I would like to fo­cus more on the ac­tual benefits most tax­pay­ers seem to over­look.

The Ma­tryoshka doll, bet­ter known as the Rus­sian nest­ing doll, re­minds me of cer­tain in­vest­ment prod­ucts. The con­cept is based on a ‘ doll’ (or in this case, in­vest­ment prod­uct) within an­other ‘ doll’, which in turn, nests within yet an­other ‘ doll’, only to find out that the costs in­volved in each of th­ese ‘nested’ prod­ucts makes the end re­sult look so unattrac­tive, that the whole prod­uct range gains a bad rep­u­ta­tion.

Re­tire­ment an­nu­ities (RAs) are a typ­i­cal ex­am­ple of this and although in­vestors tread lightly when it comes to this ‘ doll’, it ac­tu­ally holds some very at­trac­tive ‘nest­ing benefits’ in terms of tax:

1Con­tri­bu­tions made within a spe­cific year of as­sess­ment are de­ductible in that year up to a spec­i­fied max­i­mum, so Sars is in fact ‘spon­sor­ing’ your RA con­tri­bu­tions.

2If the value of your an­nu­ities ex­ceeds R75 000 by the time you re­tire, you are en­ti­tled to con­vert a max­i­mum of one-third of the value into cash. This lump sum is tax­able at the fol­low­ing rates:

3If you re­sign and you are granted a with­drawal ben­e­fit on your pen­sion or prov­i­dent fund, you can trans­fer your re­tire­ment ben­e­fit to an RA com­pletely tax-free.

4Most in­di­vid­u­als ex­pe­ri­ence a con­sid­er­able in­crease in med­i­cal ex­penses af­ter re­tire­ment. You can use your RA to ac­cu­mu­late funds in or­der to cover those med­i­cal ex­penses in a tax- ef­fi­cient way. Although your an­nu­ity in­come will be tax­able, it is also tax de­ductible to such an ex­tent that you can use it to pay your med­i­cal bills.

5Sur­plus con­tri­bu­tions (amount ex­ceed­ing the per­mit­ted an­nual de­duc­tions) can be trans­ferred to fu­ture years. Al­ter­na­tively, it can be used to in­crease the tax­ex­empt amount at (and thanks to more re­cent amend­ments, af­ter) re­tire­ment.

6There are no tax im­pli­ca­tions ( i nclud­ing cap­i­tal gains tax and div­i­dend with­hold­ing tax) on any trans­ac­tions per­formed, or i nvest­ments within an RA. The RA only be­comes tax­able at re­tire­ment.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.