Examine your savings goals early to maximise tax benefits, says Standard Bank

Feb 20, 2019

With the country in election mode and Minister Mboweni facing myriad demands across the fiscus, it is unlikely that South Africans will see significant changes or new taxes introduced during the budget announcement on 20 February.

However, rather than waiting for tax changes and announcements to shape future investment strategies, people should look to maximising their present tax benefits and be thinking about forming investments to best suit their future needs, says Errol Meyer, Advisory Propositions Legal Specialist at Standard Bank.

“The things that matter are increases in the tax rate, your retirement annuities and your tax-free investments. Primary areas that should be examined by investors are retirement annuities (RA’s) and tax-free savings investments (TFSI) and even though both qualify for tax relief, there are important differences between the two. The objective should not be about where the best tax saving can be found, but aligning benefits with the purpose of the investment.”

A savings goal should only be established once your risk profile has been assessed and benefits aligned with needs, which include saving for a child’s education or for those golden retirement years at some point in the future.  

“RA’s provide massive tax breaks and are effective tax-neutralisers when the marginal rate is high, like ours is at 45%. It is here that RAs are at their best. As you are contributing to your RA with pre-tax money, the tax rate is neutralised.  On the other hand, contributions to tax-free investments are made with after-tax money. These investments are, therefore, tax efficient to earners who have a low marginal rate when investing.”

“In other words, you should save with after-tax money when the marginal rate is low, and receive proceeds tax-free when the marginal rate is higher.”

It is also worth considering that a significant fundamental difference between RAs and TFSI plans is the way that an excess contribution is treated during an assessment year.

 “In the case of retirement fund contributions, any excess contributions are rolled forward, and the taxpayer can claim the tax deduction during a year of assessment.  Contributing more than the allowable deduction will never cause hardship, however, since these tax benefits extend beyond the date of retirement and you may even offset excess contributions against any pension or annuity income. 

“However, in the case of TFSIs, one must be extremely cautious not to contribute more than the stipulated R33 000 a year. Contributing more will result in a tax penalty of 40%  levied on any excess contributions.”

“To take advantage of being able to benefit from funds paid into an RA, it must be remembered that to claim this tax year contributions must take place before 28 February. Leave it until later, and the expenditure will only qualify for tax relief at the end of the next tax year.”

“While considering this, it will also pay to decide whether a TFSI will best serve you medium-term or long term need. If you need liquidity for unforeseen circumstances, it could be the option for you,” says Meyer.

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