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RA season? Perhaps look offshore instead

16 February 2021 Sovereign Trust (SA) Limited

It’s February again, and in tax terms, that means only one thing: it’s RA (retirement annuity) season, where taxpayers scramble to top up their RAs to maximise their tax benefits before the end of the tax year.

But while there are clear benefits in using RAs for retirement and taxation planning, or contributing to a tax-free savings account, there are far more flexible and beneficial options available to those who are prepared to look beyond South Africa’s borders, says Tim Mertens, Chairman of Sovereign Trust SA.

The benefits of RAs are well-known: taxpayers can invest up to 27.5% of their annual taxable income, to a maximum of R350 000 per year, and obtain deductible tax benefits. Investment returns on RAs are generally not subject to income tax or capital gains tax (CGT), and do not form part of taxpayers’ estates for estate duty purposes.

However, RAs are also limited in many respects. In retirement, only one-third of the accumulated pot can be withdrawn in cash (tax-free up to R 500 000), with the balance having to be invested in an annuity to provide an income. Perhaps the biggest disadvantage of the RA, though, is the prescribed investment limitations contained in regulation 28 under the Pension Funds Act. These investment provisions restrict the exposure one can have to offshore investments, currently to 30%.

“Our message to people considering topping up their RA is that there are potentially better offshore options out there, such as using their annual discretionary allowance to set up an international retirement plan (IRP),” said Mertens. “IRPs are excellent alternatives for those wanting to invest beyond traditional onshore retirement plans, and have some key benefits that simply cannot be ignored.”

The SA Revenue Service and the Reserve Bank allow South African investors to invest up to R11 million per taxpayer per year, as a combination of their annual Foreign Investment Allowance (FIA) and annual Discretionary Allowance. This far exceeds the tax-free investment limits contained in an RA and tax-free savings account.

These allowances have already been taxed, there is no further tax deduction allowed when investing into an IRP - but the ongoing advantages of the IRP far outweigh onshore retirement products, says Sovereign Trust consultant Leah Mannie.

• No regulation 28. IRPs can invest in literally thousands of global funds. There are no prescribed limits to the equity exposure nor are you constrained by geographic location of the investments. Additionally, the IRP is typically based in hard currency (such as the Pound, USD or Euro) as opposed to the Rand which can be volatile.
• Earlier retirement age. The retirement age with an IRP can be anywhere between 50 and 75. In retirement, the IRP member can elect to collapse the Plan, partly retire, or draw down ad-hoc amounts that suit their specific needs. This provides incredible flexibility and planning options. There are also no limits around the amount of cash that can be withdrawn nor is there any need to purchase an annuity. This means that one’s retirement funds can remain in equity investments even when the member is in drawdown.
• Full portability. If a taxpayer emigrates, the IRP is completely portable, whereas South African Retirement Annuity or Pension Funds are not. “As of 1 March 2021, a financial immigrated individual will need to prove that they have been non-tax resident in South Africa for 3 full years before they will be able to move their SA pensions or Retirement Annuities out of the Republic. With an IRP, there is no lock-in period to consider,” said Mannie.
• Benefits in retirement. A member of an IRP is able to elect a distribution of benefit from the contributed capital element of the Plan. Any drawback of the capital amount (namely the funding from one’s prior discretionary allowances) can be distributed back to the SA member tax free. It is only when the member draws back from the capital gains account that the distribution be subject to the South African capital gains tax regime. Being able to segment ones IRP provides more flexibility and ultimately the ability to delay a tax event.

Any South African interested in diversifying their retirement planning in the global sphere is encouraged to look at the wider offering, consult their Financial Advisor or ask for more information, says Mannie.

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The Budget Speech 2021...

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