Boost your retirement savings - and your tax return
19 February 2014 | Retirement | General | Nick Battersby, PPS
With the 2013/14 tax year drawing to a close on 28 February, it’s a good time to remember that a retirement annuity (RA) investment offers a number of advantages. Below are three reasons you may want to consider an additional contribution to your RA before the end of the current tax year:
1. Boost your tax return
A portion of the total contribution you make towards your RA in any given tax year is tax deductible. This means that when submitting your income tax return, you can claim back a portion of the money you have contributed towards your RA without impacting the value of your investment.
If you choose to invest the money that you are able to reclaim, you are further able to add to your retirement savings without any additional outlay.
2. Benefit from further tax advantages
Returns generated within RAs are not subject to income tax, Capital Gains Tax (levied on profits resulting from the sale of assets such as property or units in a unit trust) or Dividend Withholding Tax (tax levied on dividends received). RAs therefore offer a welcome tax break from the outset.
3. Disciplined investing, with flexibility
National Treasury estimates that only 10% of South Africans are able to maintain their pre-retirement level of consumption after retirement. To prepare yourself financially for the day you stop working, you need to make sure that you are saving enough and that you stay invested for as long as you can.
A regular debit order into a unit trust based RA will ensure that you save in a disciplined and structured manner. However, these investments still offer the flexibility for you to change or cease your monthly contributions or to transfer to a different product provider without penalty should your personal circumstances unexpectedly change.
How you can maximise your tax deduction for 2013/14:
RA contributions for the tax year ending 28 February are tax deductible for the greater of:
• 15% of non-retirement funding taxable income (income not already being used for contributions to a pension or provident fund);
• R3,500 less current pension fund contributions; or
• R1,750 with any excess being carried forward to the following year of assessment.
If you do not expect your RA contributions for the current tax year to reach your maximum tax deductible amount by the end of the month, it may be worth considering an additional RA contribution to do so.
