You have just six days left to take advantage of the Receiver of Revenue's special offer to reduce your taxes for the year - while at the same time improving the likelihood of retiring financially secure.
For some reason the tax year runs from March 1 to February 28. The latter is a red-letter day for two reasons: It is the deadline for the second payment of provisional tax; and it is the cutoff date if you want to reduce your tax liability for the year.
In both cases, you have to do your tax calculations before the end of the tax year. If want to reduce your tax liability, you cannot leave it until you complete your annual tax assessment, normally a few months later.
The tax laws allow you to deduct limited amounts from your taxable income to fund your retirement. It is not that you do not pay tax on these deductions. You do - but only when you draw the money at retirement. And then you will get a favourable rate of tax on any lump sum you are entitled to take - and don't forget that you pay less tax if you are 65 or older.
What you are effectively doing is deferring the tax until you retire while in the meantime using money that will one day be paid to the Receiver to derive investment returns.
Very few retirement funds allow you to inject an additional amount of cash into the fund in the last days of February, but there is an avenue open to both retirement fund members and non-members. This route is retirement annuities (RAs), which are sold mainly by life assurance companies.
RAs were introduced many years ago as a way of enabling self-employed people to enjoy the same tax benefits when saving for retirement as do people who belong to retirement funds.
However, it is not only the self-employed who can use RAs to gain a tax advantage. If you belong to a pension fund, you must just make sure you adhere to the stipulated limits on what you can deduct against tax. You are entitled to claim the greater of:
- R1 750; or
- R3 500 less the contributions you made to a pension fund; or
- 15 percent of your taxable non-retirement funding income. (Non-retirement funding income is income from which no deductions have already been made for savings in a regulated retirement fund).
The first two figures are a bit ridiculous because they have not been changed for many years, so most of us will be interested in the 15 percent.
The essential thing is to work how much you can claim.
You have not got much leeway if you are a member of a retirement fund and your entire income is retirement funding. But there are still opportunities. At this point I need to thank Hein Daffue, of the law service at Sanlam Life, for assistance with this column.
Daffue says if you do not belong to a retirement fund, the 15 percent deduction becomes attractive if you earn more than R23 333 in taxable income a year (R23 333 is the point at which your claim will be greater than R3 500).
If you are a member of a retirement fund, you can still consider other taxable income which is not retirement funding - for instance, rental income, fixed interest and taxable fringe benefits. An example of a fringe benefit is the portion of a car allowance against which no travel expenses are claimed as a deduction.
Example One here illustrates how someone who is a member of a retirement fund and who is on a top marginal tax rate of 40 percent can reduce his or her tax by R4 800 by investing R12 000 in an RA.
Example Two here illustrates two scenarios involving a person on a top marginal tax rate of 40 percent, who earns R300 000 and does not belong to a retirement fund. Notice the tax saving when the person makes use of the full 15 percent contribution to an RA.
If this person had made a contribution of only R30 000 to an RA before the end of February this year, he or she could contribute an additional once-off amount of R15 000 before the end of the tax year to raise the total deductible contribution to R45 000 for the tax year. The extra R15 000 would result in a tax saving of R6 000, making the effective cost of topping up the RA R9 000.
Daffue warns that if you want to make an annual top-up contribution to your RA, you must find out beforehand the minimum top-up payment (also referred to as a lump-sum injection) allowed by your life assurance company.
Effectively, if you are on the top marginal rate of tax and you contribute the full 15 percent to an RA, Finance Minister Trevor Manuel is making a 40 percent contribution to your retirement savings.
I call this a good deal, and I hope Manuel leaves it this way when he delivers his Budget next week. But time is running out if you want to take advantage of Manuel's special offer.
Retirement annuity health warnings
- Take out a retirement annuity (RA) as early in your working life as possible, because the longer you have it, the greater the tax advantages both in the build up to retirement and at retirement.
- An RA must only be used as a vehicle for retirement savings. You cannot withdraw any money from an RA before the age of 55 (the earliest retirement age recognised by the South African Revenue Service). At retirement, you will have to use a minimum of two thirds of the RA to buy a monthly pension.
- Never take out an RA that matures after the age of 55, unless you are over the age of 50 - and then limit the maturity period to five years. The policy can be extended without incurring a penalty up until the age of 69, at which age the Receiver of Revenue has decided that you must mature your retirement savings.
- RAs offer a range of underlying investment options. However, be very wary of costs, particularly with products that use your R750 000 foreign investment allowance, because the costs can be prohibitive.