Invest Sars refunds wisely

It’s that time of the year again when many of us are running around frantically to get together our IRP5s, tax certificates, and receipts to submit to the SA Revenue Service (Sars) before the final tax return deadline.

People earning a salary, who are in the know, can boost their income every tax year by taking advantage of the tax benefits of a retirement annuity (RA).

If one contributes part of their income to a pension fund or RA, that portion of your income – up to 27.5% of your income with a maximum of R350 000 – won’t be taxed.

For example: if your annual salary is R360 000, you will be able to save R99 000 towards your retirement without paying income tax on the R99 000.

If you were already contributing, say, R5 000 a month to a company pension fund, which adds up to R60 000 per year, you could still put another R39 000 into an RA to maximise the tax benefit.

All people receiving a salary should seek ways to make the most of the tax benefits of saving for retirement. One way of doing this is to put away any amount you get as a tax refund in a particular year into an RA. That way, you will be gaining the tax benefit and boosting your refund for the next tax year.

As with any type of saving, the effect of compounding over time is hugely important.

Take someone who is 40 years old now who receives a tax refund this year of R30 000, for instance. If they put the R30 000 into an RA now and leave it there until they retire at 60, the R30 000 will have grown to about R80 000 (if invested in a low-cost RA).

If you did this every year from age 40 until your last salaried year at age 60, by retirement the savings would be huge.

Chris Eddy is senior investment analyst at 10X Investments

As with any type of saving, the effect of compounding over time is important.

Chris Eddy Senior investment analyst at 10X Investments