Gielie de Swardt, the head of retail distribution at Sanlam Investments, says that with the end of the tax year just around the corner, smart investors are doing the calculations on how much they can still put into their retirement savings. You can allocate up to 27.5% of your total annual income to a retirement fund, to a maximum of R350 000, and deduct this from your taxable income (see “What if you contribute more?” on page 11).
While you may not be able to put extra money into your employer’s pension fund at this late stage, you can top up (or take out) a retirement annuity (RA).
“For the self-employed, an RA is the go-to solution for reducing the amount of annual income on which you pay tax and for building financial reserves for later years. In addition, it provides a safety net in case you are liquidated; creditors are not allowed to touch the money in an RA,” De Swardt says.
But what is the difference between contributing more to your employer’s fund and topping up your RA?
De Swardt explains: “With an RA, you will only be rewarded with a tax refund for any RA top-ups during this tax year after you’ve filed your tax return and the SA Revenue Service (Sars) has completed the assessment. Tax filing season opens on July 1, which means the earliest you’ll receive a refund will be towards the end of July.
“If you want to add money to your employer’s fund, you normally need to commit to the increased.
FOR YOUR CONSIDERATION
You need to consider investment costs when choosing a tax-free savings account or retirement annuity (RA), says Floris Slabbert, director at Ecsponent Financial Services.
“Informed investors should compare the TIC (total investment charge) and TER (total expense ratio) when evaluating an investment product. Your financial adviser should highlight these costs, as these seemingly small percentages add up over time.”
Slabbert says a 1% saving on costs, if you are contributing to an RA, can translate into a 25% higher retirement value after 40-odd years.
“The true power and reason for investing is for you to work less and your money to work more. Keep your eye on the areas of investment you can control, like fees, how soon you get started, how you maximise your tax benefits and who you choose as your adviser,” Slabbert says.