Learn to love the tax man

The end of February, the 29th February this year, is always an important date for retirement annuity investors; it is the end of the tax year and the cut-off date for possible reductions in tax liability for the year.

You can benefit from money that you would otherwise have paid to the South African Revenue Service by investing in a retirement annuity or adding a lump sum to an existing RA to bring your contributions up to the maximum deductible amount. 

To work out how much you could invest in an RA, you should make an appointment with a financial advisor, but a rough guide is that if you pay tax at the top marginal tax rate of 40 percent and you contribute 15 percent of your non-retirement funding income to an RA, 40% of your contribution the the RA will be tax deductible.

Tax legislation allows retirement annuity investors to deduct pre-determined limits amounts from  taxable income to encourage saving for retirement. Saving in a retirement savings vehicle enables those saving for retirement to defer payable tax. Tax is payable when you withdraw the money when you are retired, which usually means you pay the tax at a lower level than you were paying as a working person.

Money saved by 'not paying' the South African Receiver of Revenue earns investment returns until the contribution is withdrawn as a pension. In addition, capital gains made within a retirement portfolio are not liable for Capital Gains Tax. Another advantage is that contributions housed in a retirement vehicle may not be attached by creditors should you be declared insolvent.  

EFS Investment Solutions offers both pre-tax and after tax products as the company is registered with the Financial Services Board as an approved Section 13B retirement fund administrator.  Investors are able to invest in collective investments classified in the prudential sector, to build, manage and monitor their own Retirement Annuity Funds

But of course there are health warnings associated with all retirement annuities. The quid pro quo deal with the state is as follows: in return for the tax deductibility of your contribution, you are obliged to

* invest the money according to prudential guidelines. The main limiting factors are that a maximum of 75% may be invested in equities and a maximum of 15% may be invested offshore.
* you may not have access to your contributions until you are 55
* you are obliged to leave the money to your dependants.
* you may withdraw one third of your contribution at retirement, but the remaining two thirds has to be managed on your behalf by professional administrators, who pay you a monthly allowance.

Investors should know that current pension fund reform proposals are expected to limit or cap tax incentives to save for retirement.  This is because policy makers are conscious that the percentage-based calculations favour wealthier investors and offer relatively less to lower-income earners. It is possible that some indicators or insights into retirement fund updates may be announced by the Minister of Finance on Budget Day, February 20th.