Jan van der Merwe, Head of Actuarial and Product at PSG Wealth
The tax year-end of 28 February 2023 is fast approaching. Now is the time to take advantage of tax-efficient retirement and savings products. To help you do so, Jan van der Merwe, Head of Actuarial and Product at PSG Wealth shares key insights into the features of retirement annuities and tax-free savings accounts and how to get the most out of them.
What are Retirement Annuities and Tax-Free Savings Accounts?
Retirement Annuity (RA) products are designed specifically to focus on saving for retirement. Although not designed specifically for retirement, Tax-Free Savings Accounts (TFSAs) have unique tax-related features which can be leveraged to supplement retirement savings. Let’s consider the key features of each product.
|
|
TFSA |
RA |
|
|
Are there contribution limits? |
Yes. Contributions are limited to R36 000 per tax year and R500 000 over the lifetime of the product. |
No. Excess contributions can be carried forward to subsequent tax years for tax deduction purposes. |
|
|
Are contributions tax deductible? |
No. |
Yes. Up to 27.5% of the greater of taxable income or remuneration, capped at R350 000. |
|
|
Is tax payable on investment returns (interest, dividends, or capital gains)? |
No. |
No. |
|
|
When can investors access their savings? |
At any time. |
|
|
|
Are taxes payable on accessing the investment? |
No. |
Yes. Lump sums taken are taxed according to the retirement lump sum tables or the withdrawal lump sum tables, depending on the event. Annuity income received will be taxed as normal income at your marginal income tax rate. |
|
|
Is Regulation 28 applicable? |
No. |
Yes. |
|
|
Is the investment protected from creditors? |
No. |
Yes. |
|
|
Does the investment form part of my deceased estate? |
Yes. |
No. |
|
|
Are executor’s fees* payable? |
Yes*. |
No. |
|
* Executor’s fees are not applicable to TFSAs issued by life insurance companies.
While both products provide tax incentives to save, as well as benefits when creating a long-term financial plan, appropriate product choices will depend on your individual circumstances.
A combination of the two may be the right approach to achieve the desired outcomes by leveraging the benefits of each to achieve your retirement and savings goals.
Choosing the right product for your needs
Since an RA is specifically designed to help you save for retirement, it should be your first choice in this regard. It allows you to contribute larger tax-efficient savings amounts, enabling you to build up a larger pot of retirement savings. Arguably, an RA is also more beneficial for retirement savings since (with some exceptions) you cannot access these savings until the age of 55, so temptation to withdraw retirement savings (and deplete your retirement capital) is removed.
Nevertheless, TFSAs are great products to supplement long-term savings, as they give you flexibility in two key areas outlined below.
• Access of your funds. Bear in mind however, that since TFSAs are intended for long-term investment, it is advisable to limit any withdrawals from these products, and instead let them grow over time to obtain the full benefit of the tax savings.
• Underlying investment choice. TFSAs are not subject to the limitations of Regulation 28, so you have greater flexibility on the assets in these portfolios.
With both products, there is one key element to keep in mind – start saving as early as possible.
How tax-free investments can be used to supplement RA savings
A TFSA can make a valuable and flexible addition to your retirement income. The simplified example below considers an investor who saves in a TFSA to supplement the 15% of their salary they have contributed to an RA from the age of 25 years. They retire at age 65, transfer the untaxed lump sum portion of their RA to a living annuity and select a drawdown rate of 6%. (Drawdown rate is the annual income paid from a living annuity expressed as a percentage of the total portfolio value.)
At retirement, they have the option of using their TFSA savings as an additional source of tax-free retirement income. The additional monthly income they can add to their RA income from their TFSA is shown below.
Get the latest issue of FAnews