The end of the tax year (February 2021) may be the ideal time to look and possibly re-evaluate your investments to determine whether you could be taking better advantage of tax incentives. For example,
Each year you may make a pre-tax contribution to your retirement fund which can be up to 27.5% of the greater of your remuneration or taxable income.
However, the contribution amount is capped at R350 000 per tax year.
Pension or provident fund members
Should you be a member of a retirement fund through your employers such as their pension, provident fund, or an umbrella fund, you can decide to make an additional contribution to the fund.
It’s important to note that your take-home pay won’t necessarily decrease significantly because you are likely to get tax back from SARS by increasing your contribution to your retirement fund.
New and existing retirement annuity (RA) fund members
If your employer doesn’t offer a retirement fund option, you can invest in a retirement annuity (RA) in your personal capacity.
Should you already have an RA, you can choose to increase your monthly contribution and/or add a once-off contribution. You can potentially get a refund from SARS when you submit your tax return.
You can invest R36 000 per tax year (capped at R500 000 over your lifetime) of after-tax money into a tax-free investment.
You can take advantage of financial growth that is free of dividends tax, income tax on interest as well as capital gains tax.
Retirement fund or TFI – which is best for you?
The primary differences between retirement annuities and tax-free investments are:
Retirement funds provide you with tax benefits now because you are making contributions with earnings that have not been taxed; however, you typically pay tax later when you retire. It doesn’t offer much flexibility due to legal restrictions on withdrawing funds.
Tax-free investment accounts offer a lower tax-saving and contribution is capped at R36,000 per year. However, you can access the funds immediately.
So, which product best suits you? It can be argued that retirement funds offer the best tax deal, but you should make sure you can abide by the restrictions.
On the other hand, if you’re looking for long-term discretionary investments, putting your first R36,000 in a TFI may be reasonable. However, you should employ a disciplined approach and not withdraw so that you can enjoy the long-term compounding benefits.
All of this information may seem overwhelming, and you may be unsure where to begin.
At the end of the day, it’s important to look at your portfolio from an investment management perspective with the help of a proficient independent financial adviser, who can help you ensure your decisions align with your long-term financial plan.
He/she can assist you in selecting the correct products that can maximize your tax benefits based on your financial situation.