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Making the Most of Your Retirement Annuity

Many South Africans may be wondering how to make the most of their retirement annuity, especially as the end of the tax year approaches.

South African residents and ex-pats have until the 28th of February to take advantage of a government incentive aimed to encourage them to save for their retirement using a retirement annuity (RA).

retirement annuity - tax incentive

Retirement Annuity and Tax South Africa

Retirement annuities in South Africa are one of the few regimes which allow you to save for your retirement while paying less tax.

Therefore, taking advantage of this incentive should be something that all South Africans should do. When making use of this incentive, you can:

  • Defer some of your tax commitments
  • Enjoy additional tax deductions
  • Save some money on your current payable tax
  • Benefit from further tax savings post-retirement
  • Save more towards your retirement

Who can Invest in a Retirement Annuity?

Any individual who pays tax to the South African Revenue Service (SARS) can benefit from an RA. This includes:

  • Investors wanting to enhance their retirement plan while limiting costs
  • Individual employees who want to supplement their existing pension or provident fund
  • Individuals who don’t have a saving structure or plan in place yet

How Does the RA Tax Incentive Work?

Currently, the South African Government allows you to make a tax-free, annual contribution towards your RA of up to R350 000.

This can be done throughout the year in the form of monthly installments, one single lump sum per year or on a quarterly basis, for example.

In addition, Regulation 28 of the Pension Funds Act limits your potential exposure to riskier asset classes.

Individuals may also contribute more than the limit of 27.5% of their income to their RA, without being penalised by SARS.

Benefits of Investing in a Tax-Saving Retirement Annuity

Using an RA to save your money can provide both long- and short-term benefits which include but are not limited to:

  • At retirement, you will receive additional tax benefits such as the tax-free transfer of your savings into a living annuity, which also offers tax-free growth
  • Your RA growth is exempt from income tax on interest earned, capital gains tax and dividends tax
  • You are entitled to draw up to one-third of your RA benefit at any time after the age of 55. The remaining amount must be re-invested into a product which provides income, such as a living annuity. The tax payable on such an income is likely to be lower than when you were contributing which offers additional, potential tax savings
  • Investments into your RA are tax-deductible from your taxable earnings up to a limit of R350 000 per year
  • Because your RA contributions are being made from your earnings which have not yet been taxed, you will be paying less income tax
  • An RA is protected from creditors and insolvency and is also not dependent on your employment

These benefits highlight not only the importance of having a retirement annuity but also why you should try and contribute as much as you can before the end of the tax year.

Olemera – Financial Advisors in Johannesburg

Saving for the future is something that everyone should do and it’s never too late to start. Our financial advisors are able to assist you with your financial planning process and it’s our aim to help you make the most of your contributions.

For more information about the tax incentives you can enjoy when investing in a retirement annuity, or to speak to one of our advisors, please contact us.

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