With the opening of the 2018 tax season, we have had many requests from clients on ways to minimise their tax liability.  One of the most efficient tax savings products to make use of is a retirement annuity. In the coming months we will be unpacking all the benefits of investing in:

 Retirement Annuities

A retirement annuity (RA) is an investment product which allows the investor to contribute lump-sum or regular monthly amounts into an investment to provide the investor with an income in retirement.

The benefits of investing in an RA is that contributions are tax deductible but limited to 27.5% of the greater of remuneration or taxable income capped at an annual limit of R350, 000. No interest or dividend withholding tax is payable within an RA. RA’s also provide protection from creditors.

Funds in an RA may not be accessed before the investor turns 55 years old. Upon retiring from the Fund investors have the following options available to them:

  • Purchase a compulsory annuity with the entire benefit to provide a regular income in retirement.
  • A maximum 1/3rd of the benefit may be taken as a cash benefit and the remaining 2/3rd’s of the benefit must be used to purchase an annuity to provide the investor with an income in retirement.
  • If the benefit is less than R247, 500 the entire benefit can be accessed as a cash benefit.

When an investor retires he or she is taxed according to the retirement tax tables:

0 – R500, 000 Tax-free
R500, 001 – R700, 000 18% of the amount over R500, 000
R700, 001 – R1, 050, 000 R36, 000 + 27% of the amount over R700, 000
R1, 050, 001 + R130, 500 + 36% of the amount over R1, 050, 000

In the example, Investor A contributes nothing to their RA, Investor B contributes 15% and Investor C makes the full 27.5% contribution to their RA. Not only is Investor C contributing to their future savings they are also able to reduce their tax liability by R33, 307.

Investor A Investor B Investor C
Taxable Income R400, 000 R400, 000 R400, 000
RA contributions R0 R60, 000 R110, 000
Tax per Scale R93, 039 R74, 439 R59, 732
Tax saving R0 R18, 600 R33, 307

In next month’s newsletter, we will discuss the practical application of retirement annuities in Financial Planning.

Fund of the month:  Allan Gray Balanced Fund

 The Fund of this month is Allan Gray Balanced Fund. This is a multi-asset high equity fund which attempts to create long-term wealth for its investors. The Allan Gray Balanced Fund has a proven long-term track record and has delivered investors with a return (net of fees) of 16.9% since its inception in 1999.

“Someone is sitting in the shade today because someone planted a tree a long time ago.” Warren Buffett
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