"Even if your retirement savings plan is totally on track, why not let the taxman give you a little helping hand," said Cedrick Pila, 10X Investments’ Business Development Manager.
According to Cedrick, it is really very simple. He said, "You save for retirement and the taxman rewards you by giving you cash back".
By way of an example, Cedric shared the personal balance sheet of a friend, who used to argue there was no point saving more than she already was for her retirement until Cedrick ‘crunched the numbers’ for her recently.
The friend, who we will call Thando, is 27 years old and six years into her career and, in Cedrick’s words, has “had a good run”. Thando has been saving for retirement from the start of her working career, as well as putting a little extra away on the side. After the loss of R20000 in an “entrepreneurial experiment” that went sour, Thando has R50000 left in her savings account.
Cedrick said, "Thando toyed with a high-risk way of putting her savings to work, but after her ‘entrepreneurial experiment’ cost her R20000, she figured that not everyone is meant to be a business owner.”
She continued to look for something that could reward her for the discipline of saving this money, he says.
Thando had read somewhere that saving money in a retirement annuity was a good idea so she asked her friend Cedrick to do some calculations and look at the pros and cons with her.
Cedrick told Thando that he couldn’t think of any cons, as long as she chose an index tracking fund and kept costs down.
The ‘pros’ list, on the other hand, looked pretty healthy, Cedrick said. He told Thando that all the returns in a retirement annuity are free of tax. “No tax at all on interest, dividends and capital growth.”
He also told her that the money would be protected from creditors and could not be attached to her debts if her old business came back to haunt her.
The money is safe from temptation too as it is locked away until she reaches 55.
All the contributions Thando makes to an RA are tax deductible, so putting that R50000 into a retirement fund means her tax bill for the year will be reduced.
Here are her numbers:
Thando currently earns R40K a month before tax ie R480,000 a year.
She contributes 15 percent of her annual salary to her employer pension fund, that is R72000 per annum. This reduces her taxable income to R408000, making her liable for a tax bill of roughly R81 453 for the year before any allowances, exclusions and deductions. (R480000 – R72000) = R408000
If she adds the R50,000 from her savings account to a retirement annuity she will further reduce her tax liability. She will now have a taxable income of just R358000, making her liable for a tax bill of roughly R65 953 for the year before any allowances, exclusions and deductions.
"That is a whopping R15500 further reduction in her tax bill,” said Cedrick. “It was a no-brainer for Thando, who now has an additional R50000 growing in an RA and is looking forward to a nice tax refund".