Simply put, the Retirement Annuity is the only investment available to the South African investing public that allows the investor to save more money than it actually costs.
It works like this:
Assuming you have a marginal tax rate of 35%, for every R1000 that you contribute to your Retirement Annuity, SARS will refund you R350 (**within certain parameters explained below).
Again, assuming a monthly contribution of R1000, paid over a 12 month period, you will have an investment of R12000. Based on your marginal tax rate of 35%, SARS will refund you R4200 by way of a tax deduction. Effectively, you will have the benefit of an investment of R12000 that has actually cost you R7800 (R12000 – R4200 = R7800)
The real benefit comes in where you take the “gift” of the refund, in this case the R4200 and reinvest this amount as an ad hoc contribution. Now, over the same 12 month period you have an investment that has a value of R16200 (R12000 + R4200 = R16200) and you only paid R7800. Imagine this scenario over five, ten or fifteen years!
** In an effort to encourage a culture of savings, changes were introduced on the 1st March 2016 aimed at delivering more benefits to retirement fund members. From 1st March 2016 members of retirement funds, including retirement annuities, will be afforded a contribution deduction of 27,5% of the greater of taxable income or remuneration, subject to a yearly maximum of R350000.
If you are interested in maximising your retirement planning please give us a call to set a consultation.
This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)
Senior Investment Advisor
FPM Risk & Wealth Management