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Maxing your tax advantages with a retirement annuity

Before the end of the tax year (February) there is an opportunity to look at your retirement provisions and take advantage of the tax break that is available by topping up your retirement annuity.

Currently, you are allowed to deduct the amounts paid to a retirement annuity on your personal tax return. The maximum is 15% of amounts that do not contribute towards a pension or provident fund. This is captured on your IRP5 or pay slip as “non-retirement funding” income.

If your entire salary is pension funding then you can deduct up to a maximum of R1 750 towards a retirement annuity in the tax year.

If, however, you salary funds a provident fund you can then contribute up to R3 500 a claim the deduction.

It stands to reason that the higher one’s tax rate is, the more beneficial the investment will be. A taxpayer with a marginal rate of 40% will get back 40 cents from SARS for every rand contributed towards the retirement annuity. Subject to the limits mentioned.

So, effectively you pay 60 cents for every rand invested. Not a bad deal!

But wait.. there’s a another benefit which is lessor known to most. SARS taxes the returns on investments, such interest earned from cash and bonds, the rentals from property and dividends have a withholding tax applied before being paid out. Retirement annuities are exempt from these taxes which gives them a better return and therefore your values will be better over time compared to the same investment in other vehicles.

So given that you get a discount on your contributions and the returns are not taxed, there is a value proposition in a retirement annuity compared to the same investment in a unit trust or an endowment policy.

However, retirement annuities are not for everyone.

Low tax payers – the tax deduction on the contributions is not that appealing. Young people starting out in their new careers – retirement annuities can only be accessed at retirement. There are so many provisions to make when starting out and saving in a retirement annuity will be restrictive.

Taxpayers in debt – Better to get rid of your debt first. You also need an healthy contingency fund and some short term discretionary savings before locking up your money for the long term.

Read more from Financial Fitness Coach Paul Roelofse at www.investforlife.co.za

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