At Counteractive, we believe that wealth isn’t a coincidence, it’s a strategy. So, when it comes to the investment decisions you make, there are some important factors to consider. And tax is one of them. While you’ll never entirely avoid paying tax, when and how much you pay will have a significant impact on your long-term outcome.

The end of February is the end of the tax year, which is a great time to consider taking maximum advantage of the investment incentives the government has put in place to encourage us to save.

FIVE TAX BENEFITS OF A RETIREMENT ANNUITY

Contributions are tax deductible so you pay less tax

Money that you invest in a retirement annuity (RA) is deducted from your income before your tax is calculated. This deduction is limited to 27.5% of the greater of your taxable income or remuneration, capped at R350 000 per tax year.

If your contributions exceed these limits, they roll over and are automatically deducted in future years.

Returns on your investment are tax-free

You don’t pay tax on RA investment returns, such as interest income, dividends and capital gains.

You can take a tax-free lump sum when you retire

When you retire you can take up to a third of your RA as a lump sum, or all of it if it’s lower than the threshold at the time for tax-free withdrawals.

You don’t pay CGT on growth earned

In addition to the tax-deductible premiums, RAs are exempt from tax on dividends and interest, and no Capital Gains Tax is payable on growth earned in the investment. Because you are compounding all growth tax-free, your investment value at the end of 30 years could end up far higher than in a basic unit trust investment.

Favourable tax rates

You pay tax on benefits at a favourable rate. Lump sum benefits are taxed on a sliding scale with a portion of the benefit being tax-free. Income benefits, such as annuities and pensions, are taxed at your marginal tax rate.

Why is it important to invest for your retirement?

Besides saving money on tax, there are three other important benefits of investing in an RA:

• RAs create financial discipline – Because you can’t access your RA savings until the age of 55, the temptation to dip into your savings is removed.
• They help protect your family in the event of bankruptcy – The cash benefit from an RA isn’t included in your estate. If you die or you’re insolvent at the time of your death, your family still receives the cash benefit from your RA, not your creditors.
• Your investment can enjoy tax-free growth –You don’t pay tax on your investment returns between withdrawing your annuity and your retirement date.

This article is meant for information only and should not be taken as financial advice.