Investors often ask whether it is worth using a tax-deductible savings vehicle, such as a retirement fund or retirement annuity, to save for retirement.
Jenny Gordon, a senior legal analyst at Old Mutual, told the Old Mutual/Personal Finance Retire Right seminars that there are a number of tax advantages. The tax disadvantages are mainly confined to employees in the lower-income brackets.
The advantages are:
- Your contributions, within limits, are deductible from your taxable income.
- Lump sums received on retirement can be tax free up to R120 000;
- Taxable lump sums from retirement funds are taxed at a concessionary average rate. With the reduction in marginal rates, average rates of taxation are also reduced;
- With the continued reduction in marginal rates of tax, the rate at which middle-income earners will pay tax on pensions is likely to be lower than the rate at which you claimed your tax deduction on contributions; and
- Any annuity which is paid to your heirs after your death is free of estate duty and CGT.
The main disadvantage of retirement funds is:
- The taxation of the interest, foreign dividends and net rental income of retirement funds at a rate of 25 percent in the savings phase. Gordon says it was hoped that the rate would be reduced to 18 percent, in line with the lowest marginal rate of taxation in the last Budget.
All investments will have some tax consequences. Tax is only one of the factors which must be taken into account when deciding where to invest for retirement. But tax must not be the driving force behind one's decision to invest in a particular investment. All the other factors must play a part when deciding on the optimum vehicles to be used for retirement savings.
See also:
Get tax-wise with your retirement savings
How changes to the tax laws may affect your retirement plans
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