Personal investing
Personal investing

How to maximise tax benefits before the end of the tax year

Every year at around this time – ahead of the end of the tax year in February – we remind investors to think about taking advantage of some of the incentives the government has put in place to encourage us to save. We repeat this message here to help you understand what’s on offer if you want to invest some of your hard-earned money so that less lands up in the hands of the taxman. Carla Rossouw explains some of the options.

Take full advantage of the increased tax-free limits for retirement annuity contributions

The government offers incentives to save for your retirement in an official retirement saving product, such as a retirement annuity (RA). In return for putting your money away for the long term, you can invest in an RA and deduct the amount from your taxable income. In addition, while you are invested in an RA growth is free of dividends tax, income tax on interest and capital gains tax.

In March 2016, the amount you can contribute to your retirement funds tax-free was increased from 15% to the higher of 27.5% of taxable income or remuneration, capped at R350 000 per year. If you haven’t reached these limits you have until the end of February to take advantage.

Remember that RAs are available to everyone – whether you want to supplement your existing contributions to your employer’s pension or provident fund, or if you are an entrepreneur or an individual without an existing savings structure in place. If you are an employer, you can offer a group retirement annuity to your employees, giving them individual RA accounts, but managing them on a group basis.

Use a tax-free investment account to benefit from long-term tax savings

In March 2015 the government introduced a tax-free investment (TFI) product to encourage us to save our after-tax money. You can invest R30 000 per year (up to a maximum of R500 000 over your lifetime) and benefit from growth free of dividends tax, income tax on interest and capital gains tax.

How do retirement annuities and tax-free investments compare?

1. Access to your cash

Your investments in an RA cannot be accessed before the age of 55, except in very specific circumstances.

You can access your TFI at any time. However, withdrawing from a TFI account impacts negatively on your lifetime investment limit of R500 000 – you cannot replace money that you have withdrawn.

2. Tax savings

The main difference between the two products is when you get the tax benefit.

An RA offers tax savings now, i.e. you pay less tax now because you make contributions with earnings on which you have not paid tax, but you will pay tax later, i.e. you defer paying tax.

Apart from deferring tax in an RA, a further tax saving may come from paying a lower average tax rate on the benefits withdrawn from the RA at and after retirement, versus the tax saved on contributions. The first R500 000 of any lump sum you withdraw from your RA at retirement is currently tax-free, but this includes any pre-retirement withdrawals from this or any other retirement products. You can withdraw up to one-third; the rest of the benefit must be transferred to an income-providing product, such as a living annuity or a guaranteed life annuity. When you pay income tax on the benefit from your living annuity or guaranteed life annuity, you are likely to be taxed at a lower rate than when you were making contributions, which is where the potential additional tax savings come in.

With TFI products, on the other hand, you use after-tax money to invest, but you pay no tax later; your withdrawals are completely tax-free.

3. Investment restrictions

RAs are governed by the retirement fund regulations, specifically Regulation 28 of the Pension Funds Act, which limits the exposure you can have to riskier asset classes, such as equities and offshore investments. In TFI products, there are no restrictions on asset classes but you can only invest in investments that charge fixed fees, which limits your selection.

4. Maximum investments

While you can only invest up to 27.5% of your salary tax-free into an RA, there are no penalties for exceeding this limit. You can invest as much as you like, whenever you want.

It’s important to note that you can only invest R30 000 per year in TFI products. This is the maximum limit for all TFI accounts in your name, across product providers.

If your goal is to save for retirement, the maximum annual contribution of R30 000 in a tax-free savings account may not be enough to sustain your lifestyle, and, if you over-contribute, SARS will hit you with a hefty 40% tax penalty.

5. Creditors

Both the Allan Gray RA and TFI are protected against the claims of creditors and do not form part of your insolvent estate. This feature is not applicable to all TFI products but it is applicable to the Allan Gray TFI, which is a life policy.

Both the Allan Gray RA and TFI are protected against the claims of creditors

6. Estate planning

You may nominate beneficiaries for an RA, although the trustees determine the allocation between your dependants and nominees. You may nominate beneficiaries when the TFI is a life policy. RAs are exempt from estate duty, whereas TFIs form part of your estate and attract duty, although there are no executor fees if beneficiaries have been nominated.

7. Investing on behalf of your children

While it is technically possible to invest in an RA on behalf of your children, you will forego the tax benefit if they have little or no income to claim against. They can also only access the money once they retire.

Because TFIs grow free of capital gains tax, they are an excellent option for investing on behalf of your child as their true benefit will be felt through compounding gains over the long term. While you cannot invest more than R30 000 per year in a TFI, this restriction is per individual investor, so you are free to invest R30 000 in your own name and those of your children. However, the amount you invest on behalf of your children will reduce their own life-time contribution limit.

Remember, that if you donate money to your children or transfer an investment to them, you are liable for donations tax at a rate of 20% of the donated amount, which must be paid by the end of the month after the month the donation is made. There is an annual donations tax exemption of R100 000. This exemption is per person donating per year and not per donation made.

RAs and TFIs fulfil different objectives and it may not be either/or decision

Which product is right for you?

RAs and TFIs fulfil different objectives and it may not be an either/or decision, but rather a question of using both for different needs. From a retirement savings perspective, in most cases RAs offer the best tax deal. However, you need to be able to live with the restrictions described above. For long-term discretionary investments, it probably makes sense to put your first R30 000 into a TFI product. Remember, however, that you will need to be disciplined and resist the temptation of withdrawing from your TFI account in order to enjoy the long-term compounding benefits.

It is important to look at your portfolio holistically, either on your own or with the help of a good, independent financial adviser, to ensure your decisions fit in with your long-term plan.

If you are planning to make use of the tax concessions for this tax year by starting a new RA or TFI, or by making an additional contribution to an existing account, please make sure we receive your instruction, supporting documents and payment well in advance of the 28 February deadline. Remember that some methods of payment take longer than others to reflect in our bank account. Please note the cut-off times listed below:

Electronic collections
We need to receive your instructions and proof of banking details (if we do not already have this information on record) before 14:00 on Monday, 27 February 2017.

Withdrawals from existing unit trust investments into an RA or TFI
We need to receive your unit trust withdrawal instructions, as well as additional contribution instructions, before:

  • 14:00 on Wednesday, 22 February 2017, for withdrawals from Allan Gray Investment Platform accounts (i.e. if your account number starts with AGLP)
  • 14:00 on Friday, 24 February 2017, for withdrawals from Allan Gray Unit Trust accounts (i.e. if your account number starts with AGUT)

Electronic fund transfers and cheque deposits (RAs only)
As electronic fund transfers (EFTs) may take up to two business days to reflect and cheque deposits may take up to three business days to reflect, please submit your instructions and make payment sufficiently in advance. Please note that we do not accept EFTs or cheque deposits for contributions into TFI accounts.

The financial services, products or investments referred to on this website are not available to persons resident in jurisdictions where their availability or distribution would contravene local laws or regulations and the information on this website is not intended for use by these persons. This website is for information only and does not in any way constitute a solicitation or offer by Allan Gray Proprietary Limited or any of its associates or subsidiaries (collectively “Allan Gray”) to buy or sell any financial instruments or to provide any investment advice or service.

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