Don’t pay too much
As a South African taxpayer, you have few opportunities to reduce the amount of tax you are obliged to pay. One of the most effective of these is to contribute towards a retirement annuity. Every taxpayer, irrespective of age or level of income, is entitled to take advantage of this great opportunity.
A retirement annuity is effectively a portable pension plan and there are many benefits associated with investing in such a plan. Not only will you enjoy immediate tax relief from a percentage of your contributions, but you will also grow a pool of savings from which an income can be drawn once you reach retirement age.
The investment growth of a retirement annuity is not subject to income tax, capital gains tax or dividends tax, and the proceeds are not subject to an executor’s fees or estate duty in the event of death. If you encounter financial difficulties, the funds invested in a retirement annuity are protected and cannot be attached by a creditor.
You can invest in a retirement annuity even if you are already contributing towards some other form of retirement fund such as a pension or provident fund. You will be entitled to deduct a portion of the amount you contribute from your taxable income, thereby reducing the amount of tax payable. SARS effectively sponsors part of your retirement savings by allowing this deduction.
In the past, SARS used a rather complicated calculation to determine the tax-deductibility of pension, provident and retirement annuity fund contributions.
This has been simplified, and from the tax year ending February 2017 onwards, you will be able to contribute up to 27.5% of your remuneration or taxable income (to a maximum of R350 000) towards a combination of retirement funds such as pension, provident as well as retirement annuities. As a result of this change, you are likely to be able to gain even more tax relief from your retirement fund contributions than in the past, except if your total income or remuneration is in excess of approximately R1.2 million per year.
Please be aware that, although retirement annuity plans are available through a variety of financial service providers, they are not all the same. The cost structures of the various plans differ widely, and the key to the investment performance of the fund lies in the choice of the underlying portfolios.
It is vital that you choose a plan that is flexible and costeffective, and that you invest in a well-managed portfolio of funds in line with your risk profile; and that these comply with the rules governing retirement funds.
To take advantage of the tax deduction available for the 2016/2017 tax year, you must make sure your investment has been finalised before the end of February. If you miss out on this opportunity, you will unfortunately most likely end up paying more tax than is necessary. A Certified Financial Planner will be able to assist you to structure a retirement annuity plan to suit your individual needs.
• Rands and Sense – personal finance for ordinary people – is a monthly column, written by Ross Marriner, a Certified Financial Planner with PSG Wealth. His Financial Planning Office number is 046 622 2891