By: Buhle Nxumalo
When considering your retirement planning journey, do you see the glass as half full or half empty? Many people focus on how retirement planning may reduce their current disposable income – a “glass half-empty” perspective. However, focusing on the benefits your future, retired self will reap from today’s informed investment decisions offers a “glass half-full” outlook.
Let us have a look at some savvy ways to plan for your retirement and shift your perspective just a little more towards the “glass half-full approach”.
The three stages of retirement planning
Retirement planning can be divided into three key stages:
· pre-retirement planning
· at-retirement planning
· post-retirement planning
Some of the most critical decisions about your retirement occur during the pre-retirement stage, which is the focus of this article. These decisions determine when you can retire, how much capital you will have saved, the pension income you can generate, and how long you can maintain a comfortable lifestyle in retirement.
Here are three excellent tax-savvy investment vehicles to consider in the pre-retirement planning stage that we will unpack:
· Pension and provident funds (normally offered by employers to employees)
· Retirement annuity fund (offered to individuals – does not require an employer-employee relationship)
· Tax-free savings account (flexible investment option that allows tax-free growth on contributions and returns)
Making use of these investment vehicles can serve you well in your retirement planning journey and help you take advantage of tax benefits. Let us consider how you stand to benefit from contributing to these different investment options.
Pension, provident, and retirement annuity funds
Contributions to pension, provident, and retirement annuity funds (collectively known as retirement funds) are tax deductible but limited to 27.5% of the greater of your remuneration or taxable income, up to a maximum of R350 000 per tax year (March to February).
This does not mean, however, that your contributions are limited to R350 000; only the amount that is deductible against your tax bill with SARS in a tax year is limited. You can contribute more than R350 000 in any tax year and still enjoy the tax benefits in the future.
Keep in mind that excess contributions not used can be “rolled over” to the following tax year. For example, if you have contributed R500 000 to your retirement fund(s) your taxable income will be reduced by R350 000, and R150 000 can be carried forward as a deduction to be used in the following tax year.
It is also worth noting that if you choose to access a lump sum in cash at retirement from your retirement fund, any excess contributions that were not deducted previously can be offset against your retirement cash lump sum. This can reduce the amount of tax payable on your withdrawal.
A question I often get asked is, “If I don’t take a lump sum in cash at retirement, what happens to my excess retirement fund contributions?” If you use your full retirement fund value to purchase an annuity that provides an income at retirement, the excess contributions will be allowed as a tax deduction from your annuity income. This deduction can happen annually until the full benefit from the excess contributions is used up.
Your retirement nest egg typically needs to last about 30 years or more, which will require disciplined saving throughout your working life. By contributing to retirement funds, you can reduce the tax payable to SARS and grow your retirement nest egg at the same time.
There is no capital gains tax, dividend withholding tax, or tax on interest earned on any growth in investments within a retirement fund. This makes these investment products perfect for retirement savings for most investors.
Tax-free savings accounts (TFSA)
The National Treasury introduced TFSAs to encourage people to save in a tax-efficient manner. Investing in a TFSA is attractive because you do not pay tax on capital gains, dividends, or interest earned. However, there are some rules that investors need to remember when investing in a TFSA.
From 1 March 2020, the maximum annual investment contribution limit is R36 000 per tax year, and the lifetime investment limit is R500 000.
As a result, you cannot contribute more than R36 000 per tax year and you cannot replace contributions if you have made a withdrawal. These maximum limits apply across all financial service providers offering TFSAs, not to each TFSA you have. It is also important to note that any portion of the annual contribution limit not used in a tax year is forfeited and cannot be carried forward to the next tax year.
The investment growth within the TFSA does not affect your allowable annual or lifetime limit.
The South African Reserve Bank (SARB) will levy a penalty tax of 40% on all contributions that exceed R36 000 per tax year. Therefore, you would need to monitor your contributions carefully to avoid being unnecessarily taxed. It is advisable to involve a trusted financial adviser to help you in this regard.
With the end of the tax year fast approaching, it is a good idea to speak to your human resources or financial planner to top up your retirement funds. You can still take advantage of these tax benefits and boost your retirement savings before 28 February. Your future self will thank you!
* Nxumalo is a financial adviser at Alexforbes.
PERSONAL FINANCE