Retirement Annuities and Tax-Free Savings Accounts – what is all the fuss about?
As we approach the end of another tax year you may hear terms like “Retirement Annuities (RA's) contribution Top-up”, “Tax deductions” “Tax Free Savings Accounts (TFSA’s)” bandied around more often than at any other time of the year. Why is that?
By Stephan Joubert (CFP®)
Retirement Annuities and Tax-Free Savings Accounts are two investment vehicles that investors can use to plan for their future. These investment vehicles offer unique tax benefits. Let's explore each of these in more detail:
Retirement Annuities:
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RAs are long-term savings products specifically designed for retirement planning. Basically, it is a personal pension fund. The objective is to provide individuals with a sustainable income stream during their retirement similar to traditional pension funds.
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Contributions made to RAs are tax-deductible, ie individuals can reduce their taxable income by the amount contributed. The annual deduction is limited to the lesser of:
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R 350,000; or
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27.5% of the greater of remuneration or taxable income prior to the deduction of donations and foreign tax, and the inclusion of capital gains tax and any lumpsums.
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Investors may choose how their contributions are invested. Common asset classes include equity, bonds, property and money market instruments. Retirement funds are subject to Regulation 28 which stipulates that the maximum allocation to asset classes are limited to:
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75% equity (of which up to 45% may be invested in offshore),
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25% listed property,
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15% private equity,
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10% commodities,
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10% in hedge funds
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There are restrictions on accessing the funds in a Retirement Annuity. Withdrawals can only be made at retirement age (earliest age 55).
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Tax-Free Savings Accounts:
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TFSAs are savings and investment accounts that allow individuals to earn returns on their investments without incurring taxes on the interest, dividends, or capital gains generated within the investment.
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The advantage of TFSAs is that the returns generated in the invetment are tax-free. Individuals can contribute up to a R 36,000 annually, and the contributions are made with after-tax income.
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TFSAs offer flexibility in terms of investment options. Individuals can invest in various financial instruments such as equity, bonds, unit trusts, and cash.
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Unlike RAs, TFSAs offer more flexibility in terms of access to your funds. Individuals can withdraw money from the account at any time without penalties, making it suitable for both short-term and long-term savings goals. It is important to bear in mind that an individual may only contribute R 500,000 towards a TFSA in their lifetime.
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When considering retirement planning in South Africa, individuals may opt to use a combination of both Retirement Annuities and Tax-Free Savings Accounts to maximize tax benefits and flexibility. The choice between the two depends on factors such as individual financial goals, risk tolerance, and the desire for liquidity.
Speak to an independent financial advisor to tailor a retirement savings strategy that aligns with your specific needs and circumstances.
Read more about Ascor® Financial Planning Services
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