A new year brings with it an opportunity to spring clean your investment closet. Add to this the fact that end of the tax year is fast approaching and you may want to make a few new years’ investment resolutions that will ultimately see you save on your tax bill, while also putting money in your savings coffer.
“While you have to accept that you will have to pay tax at some point - as Ben Franklin reminds us that the only certainties in life are death and taxes - it is possible to pay less tax by taking advantage of the numerous incentives the South African government has put in place to encourage us to save. Every little bit counts when saving for the long term and tax efficiency has a significant impact on long-term investment return,” says Tim Molloy, head of Retail Finance at Allan Gray.
Below are Molloy’s top resolutions you can make to help you save on your tax bill this tax season.
1. Consider a Tax-Free Investment
To encourage South Africans to save more, SARS allows taxpayers to save a maximum of R33 000 per year and R500 000 in your lifetime tax-free if you invest in a Tax-Free Investment (TFI).
“TFIs are great ways to boost your savings. With a TFI, you pay no tax on the interest, capital gains or dividends you earn, or on withdrawals. TFIs are not as restrictive as retirement products – you can access your money if you need to,” says Molloy.
However, as with everything in life, there are advantages and disadvantages and you need to be sure that the product meets your needs.
“There are tax implications for over-contributing to a TFI and you cannot replace money you withdraw. The main benefits of a TFI are experienced when investing for the long term.”
2. Saving for retirement? Top up your Retirement Annuity
Molloy says that from a tax perspective, a retirement annuity (RA) remains an ideal investment vehicle to save towards a comfortable retirement.
The government allows you to get a tax deduction on the money you invest up to an annual amount of 27.5% of the greater of taxable income or remuneration (capped at R350 000 annually). However, if you invest more than this, you can still get the tax benefit in the future.
“RAs offer annual tax benefits and are governed by legislation to minimise your exposure to high-risk assets that could erode your capital and compromise your income in retirement.”
However, says, Molloy, you have to be able to live with the restrictions: You can generally only access your money when you retire (after age 55). In addition, you can only take one-third of the amount as a cash lump sum. The rest must be used to purchase a product that can pay you an income in retirement, such as a living annuity or guaranteed life annuity.
3. Don’t dip into the cookie jar
The rules around pension and provident funds are different from those governing retirement annuities and you may be offered access to your investment when you leave your employer. While times may be very tough, try not to be tempted to dip into your retirement savings.
“At all times try and preserve your accumulated retirement savings, it will make a massive difference to your nest egg. Withdrawing funds from your retirement savings before you retire, not only reduces the tax-free amount available to you when you retire, but also causes the benefit that you take at retirement to be taxed at a higher rate,” explains Molloy.
4. Seek financial advice
There are a number of investment products available, including unit trusts, endowments, retirement annuities and tax-free investments.
“These investment products fulfil different needs and you may need more than one depending on your goals and timeframes,” says Molloy.
“A good course of action is to understand the tax benefits of each and make sure your portfolio maximises these,” he notes, adding that it is worthwhile consulting with an independent financial adviser for help.
“They have the experience and expertise to help you determine how much you need to save towards your retirement and develop a plan that meets your needs and investment goals.”
5. Act now
If you haven’t contributed 27.5% of your taxable income/remuneration to your retirement fund in this tax year, you have until the end of the tax year (28 February) to open an account or top up your investment. You also have until 28 February to open a TFI, or contribute up to R33 000 if you haven’t done so already.
“If you are planning to make use of these tax concessions, you will need to do so well in advance of the 28 February deadline to allow time for your investment manager to process your investment. Remember some of these are annual tax benefits – if you don’t use them, you lose them,” concludes Molloy.
To learn how to be more tax savvy, sign up to receive Allan Gray’s 4-part email series.
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