Will RA reduce my tax?
ANSWERED: READER LOOKS FOR TAX EFFICIENCY IN RETIREMENT
Unit trusts, offshore, share portfolio, endowments are some alternatives.
AMoneyweb reader asked: I recently retired at 60 (October 2019) and still need to convert my retirement contributions to a monthly income. I have cash savings of about R700 000 from which I plan to derive an income for the foreseeable future until I can decide whether to find a part-time job or “retire”.
My final tax on remuneration was in excess of R200 000. I want to reduce my tax liability by purchasing a retirement annuity (RA) using some of my cash savings. My final payslip indicates taxable income and gross remuneration. My gross remuneration is about R300 000 more than my taxable income. My total pension fund contribution at retirement was R68 100.
Is the 27.5% maximum contribution based on taxable income or gross remuneration, and would purchasing an RA from my savings be advisable? I can contribute the maximum allowable if need be. I am debt-free with only normal monthly expenses.
Mauro Forlin of Global & Local Asset Management answers the question:
Without knowing your exact personal circumstances, it is very difficult to provide a concrete answer to your question.
The below is a general response to your query.
Is the 27.5% maximum contribution based on taxable income or gross remuneration? The contributions to a retirement annuity are based on your taxable income (including capital gains, prior to March 1 2019), but excluding lump sum and severance benefits, prior to the deduction for donations. The annual deductible amount is limited to R350 000. Any excess contributions may be carried forward to a subsequent tax year. Would purchasing an RA from my savings be advisable? One should consider that there are several factors to keep in mind:
Many people do not realise that there is no age limit to continue to place capital into a retirement annuity, as a result, many investors miss the tax opportunity in investing in a retirement annuity after they have “officially retired”. How much have you contributed to a retirement product in the current tax year?
What was your total taxable income for the year? Retirement products do also have certain restrictions when accessing the funds:
Only a maximum of one third can be taken as a cash lump sum. This could be subject to taxation if you have received a severance package or withdrew from a retirement product previously.
The remaining two-thirds needs to be used to purchase an income-generating annuity such as a living annuity or life annuity. Depending on the amount being withdrawn, this could also be subject to income tax.
You can cash in the full investment if the value is less then R247 500, again this could be subject to taxation.
Retirement products are also subject to legislative restrictions such as Regulation 28.
Currently, Regulation 28 allows you to invest a maximum of 30% into foreign instruments, excluding Africa.
You could consider alternative investment structures such as unit trusts, offshore, share portfolio, endowments or tax-free savings accounts. All the different investment options have their benefits. Lastly, please keep in mind that there are many accepted and legal ways of reducing your tax liability.
There are many legal ways of reducing tax liability