Af­ter-tax money to a pen­sion fund?

HNWIS: PROS AND CONS OF GO­ING BE­YOND R350 000

The Citizen (Gauteng) - - BUSINESS - Ingé Lam­precht

You need to make sure that you have enough liq­uid­ity on the out­side.

Since March 2016 tax-de­ductible con­tri­bu­tions to pen­sion funds, prov­i­dent funds and re­tire­ment an­nu­ities (RAs) have been capped at R350 000 (or 27.5%) per an­num.

While high-net-worth in­di­vid­u­als (HNWIs) who pre­vi­ously con­trib­uted over R350 000 to these ve­hi­cles may con­tinue to do so, ex­cess con­tri­bu­tions will be made with af­ter-tax money and their take-home pay will re­duce.

So does it still make sense for HNWIs to con­trib­ute over R350 000 p.a. to a re­tire­ment ve­hi­cle if they lose the up­front tax ben­e­fit or should they rather use dis­cre­tionary in­vest­ments?

Wouter Fourie of As­cor In­de­pen­dent Wealth Man­agers said it’s im­por­tant to as­sess a per­son’s over­all fi­nan­cial sit­u­a­tion.

In re­tire­ment, liq­uid­ity’s very 1 im­por­tant and one must de­ter­mine if in­vestors have suf­fi­cient funds out­side a re­tire­ment ve­hi­cle, he stressed.

Peo­ple who con­trib­ute to a RA or pen­sion fund may only with­draw one-third of the money as a lump sum at re­tire­ment. The first R500 000 will be tax free. The re­main­ing two thirds must be an­nui­tised.

“You need to make sure that you have got enough liq­uid­ity on the out­side. So it does not ben­e­fit me to have all my sav­ings in this re­tire­ment fund if I ex­ceed the cap and I don’t have any ex­ter­nal money avail­able.”

In terms of Reg­u­la­tion 28 of the Pen­sion Funds Act, re­tire­ment funds can’t in­vest more than 75% of the funds in equities, and 25% off­shore.

In­vestors who need more off­shore ex­po­sure would be able to go be­yond the Reg­u­la­tion 28 lim­its in a dis­cre­tionary in­vest­ment and would also have the ben­e­fit of liq­uid­ity.

But, if an in­di­vid­ual has suf­fi­cient liq­uid­ity in his port­fo­lio, re­turns on pen­sion fund con­tri­bu­tions are al­lowed to grow free of tax while inside the fund, so growth would be bet­ter than in a nor­mal unit trust struc­ture, Fourie said.

Jenny Gor­don at Alexan­der Forbes said in 2014 a new sec­tion 10C was in­tro­duced into the In­come Tax Act.

“If you make an af­ter-tax con­tri­bu­tion to a fund, when you start draw­ing an an­nu­ity you can ac­tu­ally now set off that af­ter-tax con­tri­bu­tion against com­pul­sory an­nu­ity in­come so that you ac­tu­ally don’t lose it.”

Gor­don said a lot of high-in­come earners en­joyed us­ing this pro­vi­sion.

“They find that dur­ing their [first] cou­ple of years into re­tire­ment when their in­come tax is still quite high, they ac­tu­ally are able to com­pletely write-off from tax the full amount of their com­pul­sory an­nu­ity in­come.”

Ron­ald King at PSG Wealth said there are a num­ber of rea­sons why he’d def­i­nitely con­sider con­tribut­ing over R350 000 per an­num.

The first R500 000 will be tax free.

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