CAPE TOWN – It’s that time of the year when many of us are running around frantically to get together our IRP5s and tax certificates and receipts to submit to Sars before the final deadline for tax returns. This year it falls on 31 October, which is just around the corner.
Some people dread the process because they are anxious about having to pay in additional taxes. But, for many others, this could be the time when a nice bonus comes their way. The difference between the two could be as simple as doing a little research and making a few adjustments to take advantage of all the tax incentives available to you.
As Chris Eddy, Senior Investment Analyst at 10X Investments, explains, “People earning a salary, who are in the know, can boost their income every tax year by taking advantage of the tax benefits of a retirement annuity. It’s a savings vehicle which is used by government to incentivise people to save towards their retirement years, when they will no longer be earning regular income. The state wants people to be able to fund their retirement themselves and not become dependent on government, which is why there is a tax benefit offered to people who contribute to a retirement annuity.”
The tax benefit works like this: If one contributes part of one’s income to a pension fund or retirement annuity, that portion of your income (up to 27.5 percent of your income with a maximum of R350 000) will not be taxed. “It’s almost as if the taxman is contributing towards your savings,” Eddy explains, “and it would be a shame not to take advantage of that.”
By way of example: If your annual salary is R360 000 you will be able to save R99 000 (ie 27,5 percent of the total income) towards your retirement without paying income tax on the R99 000. If you were already contributing, say, R5 000 a month to a company pension fund, which adds up to R60 000 per year, you could still put another R39 000 into a retirement annuity to maximise the tax benefit.
Eddy suggests that all salaried people seek ways to make the most of the tax benefits of saving for retirement. “One way of doing this is to put away any amount you get as a tax refund in a particular year into a retirement annuity. That way, you will be gaining the tax benefit and boosting the amount of your refund for the next tax year. Get into the habit of doing that each tax year, and you will see it creates a virtuous cycle and leaves you with a healthy retirement pot when the time comes.”
As with any type of saving, the effect of compounding over time is hugely important. Take someone who is 40 years old now who receives a tax refund this year of R30 000, for instance. If this person puts the R30 000 into a retirement annuity now and leaves it there until they retire at the age of 60, the R30 000 will have grown to a figure of around R80 000 (if invested in a low-cost retirement annuity with a company like 10X Investments where the fee is 2 percent less than the industry average).
Imagine if you did this every year from the age of 40 until your last salaried year at age 60. The savings by the time of retirement would be huge. And, considering that the investment made would largely be from a tax refund from Sars, this need not have a major impact on your disposable income during the years you are working - it’s money that was never really part of your income anyhow.
“When one gets a nice refund from the taxman, it’s tempting to go out and spend it on lifestyle items: clothes, holidays, new furniture, and so on. But this short-term excitement surely can’t compare to the relief of knowing you will have enough money to maintain your quality of life after you retire,” Eddy concludes.
So, if the taxman sends you a refund this season, think of your future – and invest the refund into a retirement annuity.