Almost every South African will pay some form of tax in their lifetime. Putting petrol in your car to get to work? Almost 70c of every rand spent on fuel goes towards taxes and levies.1 Paying for a cup of coffee? 15% of your cup will be paid over to the tax man through Value-Added Tax (VAT). And what about the elation of seeing a gross salary figure in an offer of employment? Only to be crushed by disappointment at the significantly after-tax amount.
South Africa is in the Top 10 most heavily taxed countries around the world. As a country, we pay a lot of tax, but are we seeing a return on our investment? Attempting to answer that question for everyday South Africans is Johann Rossouw, a Certified Financial Planner (CFP) at Fiscal, a wealth management company. He starts by saying it is no surprise to hear more and more people grumbling about the taxman’s slice of their pie; but suggests what we should do instead is to learn what we as ordinary taxpayers can do to reduce our tax bill in a legal manner.”
One of the most effective vehicles to reduce your income tax bill is a retirement annuity. Retirement annuities are, in essence, a private pension fund which you can use to save for your retirement. Contributions towards a retirement annuity are tax deductible – individuals may deduct up to 27.5% of their gross remuneration or taxable income (whichever is the higher) in respect of their total contributions to a pension, provident or retirement annuity fund. This is subject to an annual limit of R350 000 per person.
Rossouw says that currently, retirement annuities are income tax, dividend tax, and capital gains tax exempt. No tax is payable on transfer from another approved pension, provident or retirement annuity fund into a retirement annuity fund.
“This tax saving is best illustrated by way of an example,” says Rossouw, “Smart and his twin brother, Lazy, have recently started their first jobs. They are both earning a gross income of R20 000 per month. Smart has approached a financial planner and started saving 15% of his salary towards a retirement annuity. His brother, Lazy, has decided to rather spend this portion on a brand-new car. Assuming they are both members of a medical aid, the tax payable by each of them will be determined as follows:
Rossouw adds, “The tables above show that Smart will pay less tax, while at the same time putting money away for his retirement. Lazy on the other hand gets left behind.”
Rossouw concludes that while a retirement annuity is by no means a “silver bullet that will solve all your tax problems; the benefit of investing in a retirement annuity is clear. There are several considerations to be aware of when determining whether this is the most appropriate investment vehicle for each individual. These considerations include - but are not limited to – accessibility of your funds, the asset allocation of your overall portfolio and financial institutional fees.”
It is important to always seek impartial financial advice from a CFP before making any decisions that can impact your overall portfolio.
PERSONAL FINANCE