Advise your clients to top up their RA and provide a reason to smile this tax season

Tandisizwe Mahlutshana, Executive of Marketing at PPS Investments.

Encouraging your clients to top up their retirement annuity before the end of the current tax season will give them a reason to smile.

This is the message from Tandisizwe Mahlutshana, Executive of Marketing at PPS Investments, who says that advisors and brokers should urge their clients to act as soon as possible. “The current tax season comes to an end on 28 February 2018, so it is important to remind clients that the time to take advantage of tax benefits in this financial year is quickly running out.”   

Mahlutshana explains that Government’s ongoing retirement reform is geared towards incentivising South Africans to make adequate provision for their golden years spent in retirement. Since the 2016 tax year the tax treatment of contributions to retirement funds has been revised and the calculation simplified. 

“It is now possible for individuals to invest up to 27.5% of their annual income in a retirement annuity up to a maximum tax deduction limit of R350 000.” 

Mahlutshana notes that the possible benefits of increasing retirement annuity contributions in this way can also be demonstrated to clients by way of a simple example. “Consider a 40-year-old investor with an annual salary of R600 000, who decides to increase his retirement contribution from 15% to 27.5% of his annual income. His potential retirement savings could already be nearly doubled from R4.4 million to R8.1 million in real terms.” 

The said investor would also reduce his annual income tax liability. “When the investor’s retirement contribution was at 15% of his annual income, he qualified for an annual reduction in taxes of R33 732. In comparison, increasing retirement contributions to the maximum of 27.5%, reduces annual income tax by R60 732. Reinvesting those tax deductions into the retirement fund could also be used to cover the tax implication when he makes withdrawals or receives an annuity income at retirement.” 

According to Mahlutshana, there is even a strong argument to be made for increasing annual retirement contributions beyond the 27.5% limit. “SARS has made one more benefit available to taxpayers. Contributions that exceed the allowable deduction are carried forward and can be claimed in future tax years. That is to say, if an individual invests 35% of annual income in an annuity, SARS allows a rebate of 27.5% in that year. The remaining 7.5% can be added to the following year’s tax return.” 

Lastly, Mahlutshana says that brokers and advisors should be talking to their clients about the importance of having a tax free investment account. “It is something that we would encourage every South African to exercise. It allows one to save money with zero tax on investment income or growth. Individuals can invest up to R33 000 per tax year, up to a lifetime limit of R500 000. It is one of the best ways to boost a retirement nest egg with a lump sum. However, It’s important to make your client aware of the possible pitfalls as well. There are significant tax penalties attached to exceeding the annual or lifetime limit, which can actually erode the value of the client’s investment.” 

To encourage individuals to top-up their retirement annuities before the end of the current tax season PPS Investments recently launched its #reasontosmile campaign. The campaign practically demonstrates the payback that taxpayers can expect from topping up their annuities, giving them a reason to smile. To find out more about the campaign visit www.reasontosmile.co.za