A guide to tax-efficient products to meet your retirement and savings needs

Johannesburg – After another unexpected and eventful year, the festivities have officially ended, bringing us back to square one – outlining future goals and saving plans.

For those who were fortunate to receive additional income in the form of a bonus or 13th cheque  – now is the time to consider saving a portion of your income in a tax-efficient manner.

This article provides insight on products that are suitable for maximizing the tax benefits available to you as we approach the tax year-end on February  28.

The role of RAs and TFSAs in retirement planning

Retirement Annuity (RA) products have been around for many years and are designed as a vehicle focused on saving for retirement.

Tax-free savings accounts (TFSA) were introduced in 2015, and though not designed for retirement, they do provide unique rules around tax treatment, which can be leveraged to supplement retirement savings.

While both products provide tax incentives to save and benefits when creating a long-term financial plan, appropriate product choices depend on individual circumstances.

A combination of the two may be a suitable way to achieve desired outcomes by leveraging the benefits of each to achieve your retirement and savings goals.

Key considerations when balancing investments

Both products offer investors a tax advantage as they attract no tax on interest, dividends and capital gains while funds are invested.

Note that even without these tax treatments, the SA Revenue Service allows certain annual tax exemptions on investments outside of these products, namely a R23 800 annual interest income allowance and a R40 000 annual capital gains tax exemption.

So, if you receive less than R23 800 in interest income or less than R40 000 of capital growth, you will not owe tax on your investments.

You will, however, still be charged dividends tax of 20% on all shares that have paid you a dividend.

Contributions

There are no contribution limits in an RA. You can contribute and deduct up to 27.5% (capped at R350 000) of your total annual taxable income in any given tax year, and excess contributions can be claimed as deductions in the next year of assessment.

By contrast, TFSAs have a maximum contribution limit of R36 000 a tax year and R500 000 over the lifetime of the product, and contributions exceeding these limits are penalised at a 40% tax rate.

Annual contributions are not tax-deductible and do not carry over to subsequent tax years. So it’s important to use as much of each year’s TFSA allowance as possible.

Contributions to both products can be made on a lump sum, monthly or ad hoc basis, but the exact payment arrangements vary between product providers.

Accessing contributions

RA savings can only be accessed at retirement, at which stage a maximum of one-third of the withdrawal amount can be taken as a lump sum, and the remainder must be invested in a retirement income product.

On withdrawal from an RA, the lump sum portion will be taxed according to the retirement lump sum tax tables or the withdrawal lump sum tax tables (depending on the event).

Income from the retirement income product will be taxed at your marginal income tax rate.

TFSA savings can be accessed at any time and there is no tax payable on the amount withdrawn. There is also no limit on the amount you can withdraw, but you cannot replace the withdrawn amounts.

Investment choices

RAs are subject to certain restrictions on asset classes, prescribed by Regulation 28 of the Pension Funds Act.

Broadly speaking, these limits are 75% equity, 30% offshore assets and 25% property.

These limitations do not apply to TFSAs, so a significant benefit of TFSAs is that they allow investors an opportunity to achieve almost 100% offshore investment exposure – for example, by investing in a unit trust feeder fund.

• Van der Merwe is head of actuarial and product at PSG Wealth