Take advantage of RA season to boost your retirement savings

According to the National Treasury, over 94% of South African’s are currently not saving enough money for their retirement. To encourage self-sufficiency and dissuade reliance on the State, the Government has created a number of great tax breaks to incentivise South Africans to save more money for their old age.

Retirement Annuity Season, or RA Season as it’s referred to by financial advisors, is one such opportunity. Steven Nathan, CEO of 10X Investments, says that making a large, once off deposit to a retirement annuity before 29 February 2016 could give tax payers a unique chance to save on tax. 

The tax benefits that underlie an RA can increase the value of the pay-out by as much as 30%. But Nathan warns that this is only true if tax payers make use of a low fee retirement annuity. “Our research suggests that paying 1% per annum more in management fees for a retirement annuity over the long term will offset the entire RA tax benefit.” says Nathan.

Nathan says that the advantage of a retirement annuity is that contributions can (within limits) be deducted for tax and the investment return earned by the fund is also not taxed. “Retirement annuities are excellent investment vehicles. They are charged no income, dividend withholding or capital gains tax on the investment return,” he explains.

In addition, other than for any contributions not claimed for tax, your retirement annuity does not attract estate duty in the event of death. “Benefits can be made payable to financial dependents or nominated beneficiaries without having to go through the estate process. Your money is also safe against the claims of your creditors. Nobody but you and your dependants, can access the proceeds of your retirement annuity,” he adds. 

RAs are ideal for persons who are self-employed, who earn significant amounts of money outside of their employment income and those who don’t have a retirement fund at their workplace. 

He points out, however, that topping up your retirement annuity for the 2015/2016 tax year will only provide a tax saving if the maximum contribution hasn’t already been reached – that is 15% of your non-pensionable income. 

“While you can invest in as many retirement annuities as you wish, the tax benefit is determined as an aggregate and not in respect of each individual RA,” adds Nathan. 

Non-pensionable income refers to income that is not subject to a pension or provident fund contribution at the workplace. If you belong to a work place pension or provident fund, then your pensionable income typically includes fixed remuneration such as your salary or wages, but may exclude variable amounts such as commissions, bonuses and overtime. 

With the upcoming retirement reforms kicking off on 1 March 2016, the concepts of pensionable and non-pensionable income will fall away. The 27, 5% per annum contribution cap will in future be determined with reference to taxable income and gross remuneration, and will be applied to the aggregate of all your retirement fund contributions. 

While RA Season encourages people to save in order to benefit from tax advantages, South Africans need to get into the habit of saving consistently and as early as possible rather than waiting for RA season,” concludes Nathan. “If you save early, time is your friend, as your investment benefits from compounding returns.”