Business Brief

Investing in retirement products not only offers tax benefits but is designed to offer a structured approach to saving towards retirement over the long term, along with features to help safeguard retirement savings.    

The government introduced tax incentives in the early 1920s to encourage people to save towards retirement. There are several tax benefits associated with retirement savings. In this article, we will discuss ways to take advantage of the tax benefits associated with retirement savings through retirement annuities (RAs).  

Boost retirement capital  

A key consideration when saving for retirement is to ensure that a member has enough funds to retire comfortably. By saving towards retirement in an RA, they can increase the absolute amount of their pension pot by topping up their RA.   

One of the most significant advantages of topping up an RA is that it will boost retirement savings over the long term and the power of compound interest takes full effect over time.   

Members can further boost their retirement savings by reinvesting the tax rebate received from SARS when they include their RA contributions in their tax returns. 

Source: PPS Investments. For illustrative purposes only. Past performance is not indicative of future performance.   

Top up an RA  

When saving for retirement with an RA, it is possible to claim back up to 27.5% of remuneration, or taxable income of up to R350 000, in a tax year. The tax deduction limit applies to the cumulative annual retirement contributions, regardless of whether a member has saved in a retirement annuity fund, a pension fund, or a provident fund.   

The tax benefit can be carried forward to reduce tax liability if a member exceeds the 27.5% maximum contribution limit in future tax years. Ultimately, the more the RA has topped up contributions for the tax year, the higher the tax benefit.  

Dividend, interest and capital gains tax benefits of an RA  

In addition to the tax-deductible premiums, RAs are exempt from tax on dividends and interest, and no capital gains tax is payable on growth earned in the investment.   

The tax benefits extend to when a member reaches retirement, where they can make one tax-free withdrawal of up to one-third of their investment as a lump sum and the first R500 000 is tax free. Any lump-sum withdrawal exceeding the R500 000 tax-free portion will be taxed according to the retirement tax tables. If a member has more than one RA or retirement savings vehicle, the withdrawal limit applies to their total retirement savings amount.  

Tax-free investments – another opportunity to save on tax  

One of the most popular savings tools in recent years is a tax-free investment account (TFIA).  

Since launching in 2015, tax-free savings and investments have become a popular choice. The tangible benefit of a TFIA is that individuals do not have to pay income, dividend or capital gains tax on the returns from their investments. Individuals can invest up to R36 000 per tax year until they reach the lifetime limit of R500 000. TFIAs can help boost members’ tax benefits and bolster their retirement savings.  

Although tax-free investments are not designed to be the sole source of retirement savings, they present an opportunity to boost the nest egg with a lump sum. Tax-free investments are not subject to Regulation 28 (which limits the percentage allocated across assets or asset classes), offering more freedom in choosing investment options.   

It is important to note that if the annual or lifetime limit is exceeded, there will be significant tax penalties that can impact the value of the investment. In addition to the tax benefits, tax-free investments should be part of any financial portfolio. Tax-free investments can be a strategic part of financial, retirement and estate planning. Furthermore, it allows diversifying portfolio exposure across asset classes (bonds, cash, equities, etc.) with no limits or restrictions, to suit unique financial needs.  

Carefully consider all retirement vehicles  

Both an RA and tax-free investment are extremely tax-efficient vehicles to be considered in any retirement plan.

By Natalie Kiewitt, Executive: Operations at PPS Investments

PPS Investments Group is a subsidiary of Professional Provident Society Insurance Company Limited (PPS), a licensed insurer conducting life insurance business, a licensed controlling company and an authorised FSP. PPS Investments Group consists of the following authorised Financial Services Providers: PPS Investments (Pty) Ltd (“PPSI”), PPS Multi-Managers (Pty) Ltd (“PPSMM”) and PPS Investment Administrators (Pty) Ltd (“PPSIA”); and includes the following approved Management Company under the Collective Investment Schemes Control Act: PPS Management Company (RF) (Pty) Ltd (“PPS Manco”). Financial services may be provided by representative(s) rendering financial services under supervision.