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Let the taxman give you a New Year’s gift!

04 February 2008 Liberty Life

– Liberty Life explains how

The taxman is ready to give you a financially rewarding New Year’s present … if only you’ll let him.

The seasonal tip comes from leading life assurer Liberty Life and relates to the increasingly favourable tax treatment of retirement annuities (RAs).

An RA top-up or single annual commitment is a good idea at any time, but can be particularly helpful just before the end of the tax year.

Frank Schutte, Managing Director of Liberty Life’s individual life business unit, points out: “Recently improved tax-breaks add up to a handy ‘gift pack’ from the Receiver.

“Unpack the bundle and you will see a whole range of tax benefits of particular interest to RA owners.”

On contributions: taxpayers can claim tax deductions on contributions to RAs. The deduction is the greater of:

· R1 750,

· R3 500 less deductible pension fund contributions; or

· 15% of non-retirement funding income (NRFI) – income not taken into account in determining pension or provident fund contributions. NRFI may include bonuses, interest income (less the exempt amount) or income received as a sole proprietor or partner in a partnership.

For example, Mrs X does not have a corporate pension plan, but makes a contribution of R3000 a year to her RA. She has NRFI income of R400 000. Taking into consideration the allowable tax deductions on contributions she could obtain a deduction of up R60 000 on her contributions (15% x NRFI). She could therefore make a R57 000 ad hoc payment to her RA and still receive the amount full as a deduction

On investment growth in the fund: Government has removed the previous 9% tax on certain income in retirement funds. Investment growth in the fund is not subject to Capital Gains Tax at all.

This means build-up within an RA will not be subject to income tax or CGT – a substantial benefit to retirement planners!

On retirement: With effect from 1 October, 2007, the first R300 000 of a lump sum is tax free. Furthermore, contributions to an RA for which a deduction has not been obtained will be added to the R300 000. On the next portion of the lump sum (R300 000 to R600 000) a flat tax rate of 18% applies. This is stepped up to 27% on the next R300 000 (R600 001 to R900 000) while the portion of lump sums above R900 000 attract 36% tax.

The rule about taking only one-third of a retirement entitlement as a lump sum is waived when the total value of the RA is R75 000 or less. In such a case, the retiring taxpayer can take the lot as a lump sum.

Schutte comments: “In effect, the taxman helps you save for retirement. If the option is to leave income fully exposed to tax at the top marginal rate or diverting the cash into a product like an RA; then the smart move is to commit the cash to retirement planning.

“Take advantage of tax-breaks like this and you learn to love the taxman.”

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