Are you maximising your tax savings this RA season?
The end of one year and the start of another is a natural reminder to take stock, reflect on accomplishments and shortfalls, and commit to doing things differently in the year ahead to achieve better outcomes.
Retirement annuities (RAs) are tax-efficient products, and the looming tax year-end in February means you should act soon if you still want to maximise your tax savings for this year. Below we have gathered five common investor questions on RAs to steer you in the right direction.
1. What are the key tax benefits of saving in an RA?
Your RA contributions reduce your taxable income, up to certain limits. This means that you pay less income tax, up to the specified limit (up to 27.5% of the higher of taxable income or remuneration, capped at R350 000 per tax year). This effectively means that your contributions are partly subsidised by tax savings.
Another big tax advantage is that the growth on your investment is tax free. In addition, at retirement, the lump sum benefit portion is exempt from tax up to a specified limit. Furthermore, not only is tax delayed until retirement, but ultimately you will also pay less tax. This is because the tax rebates, tax rates and allowable deductions for people from ages 65 and 75 mean a reduced tax liability.
2. Are my RA benefits safe from creditors?
Your RA savings are safe from creditors and any form of personal financial liability you may suffer during your pre-retirement years. This ensures that you will still have retirement savings available when you retire, even if you suffered some financial setbacks during your working years.
3. Can I access my RA before 55?
An RA is designed to help you save for retirement and can usually only be accessed once you have reached age 55. Some exceptions do apply in special circumstances though – for example, if you become disabled or decide to emigrate.
4. What if I decide to emigrate? Will my retirement savings be lost?
The South African Income Tax Act allows members of an RA fund who have not yet retired, but who have emigrated, to access a lump sum from their RA contracts. This requires permission from the South African Reserve Bank (SARB), and will only be granted to someone who has formally emigrated. Note that this lump sum payment will be subject to tax.
5. Do I need to save in an RA every month?
This will depend on the specific product you select, but generally contributions can be made in the form of a lump sum, regular debit order or ad hoc payments. The minimum initial lump sum investment for the PSG Wealth Retirement Annuity, for example, is R20 000, and the minimum amounts for debit order investments are R500 a month, R1 500 a quarter, R3 000 half-yearly and R6 000 yearly. You won’t be penalised if you miss, stop or reduce debit order investments, but the growth of your retirement savings will be impacted.
RAs are designed to help you save before retirement, to ensure that you have a pool of savings to draw an income from once you retire. Make the most of the time you have, and the tax-benefits RAs provide as you get one year closer to retirement.