As we fast approach the end of the tax year, it is important to look at the contributions we have made to both our Tax-Free Savings accounts, as well as our Retirement Annuities to ensure we have maximized the tax benefits we can receive from these investments to help in reducing our annual tax payable, and even avoid having to pay any tax at all.

History of Tax-Free Investments

Tax-Free investments are still a relatively new concept to most investors, even though the offering has been around since March 2015. Simply put, our Government is trying to encourage South Africans to save in an attempt to lessen the social payments that are busy crippling our national budget. We highly recommend that each and every client of ours has a tax-free investment in their own name. Whether you are new to investing, or are nearing retirement, a tax-free investment is a fully liquid, transparent, and flexible vehicle that offers tax benefits which will become significant overtime.

Back in 2015, it was typically the banks that were first to offer these Tax-Free investments to their clients. As there were a few regulatory queries being ironed out by the authorities, the first Tax-Free investments offered were standard money market investments which since 2015, have offered investors an annualized return of around 7% per annum. The whole idea of this offering, for investors who are making use of the tax benefits, is to generate capital growth over the long-term to supplement the more traditional investment instruments while taking advantage of not having to pay capital gains tax, income tax, etc. In order to maximize this advantage, we recommend including growth orientated assets into your Tax-Free investment if your investment horizon allows.

Currently, no transfers of Tax-Free investments are allowed, however, this is being investigated and we are hoping this will become a possibility in the near future.

Tax-Free Savings Account

Every person can contribute up to a maximum of R33,000 per year across their tax-free savings investment account, tax year ending February of each year, up to a maximum of R500,000 in a lifetime. By contributing the maximum possible to a tax-free savings each year, you ensure that you reach your lifetime limit in the shortest time possible, allowing your maximum lifetime contribution to attract growth which is completely tax-free for a longer period of time, and ultimately attract increased compounded interest.

Let’s compare different contribution scenarios

This comparison depicts the long-term difference between investing in an interest bearing Tax-Free investment generating 7% per annum returns vs a growth orientated investment generating 12% per annum over the 20-year period.

If you contribute the maximum contribution of R33,000 per annum up to the maximum lifetime of R500,000, and retain the investment for a period of 20 years from the start of the investment, the capital value could grow to an estimated R1,200,000 tax-free at 7% growth, and an estimated R2,200,000 at 12%.

By making the same total lifetime contribution over the same investment period, you could earn an estimated additional R1,000,000 through higher growth assets.

Tax benefits of a Retirement Annuity

Your Retirement Annuity contributions can reduce your taxable income by contributing up to 27.5% of the higher of either your taxable income or remuneration into a Retirement Annuity, up to a maximum limit of R350,000 per annum. This means that you pay less income tax and effectively means that your contributions are partly subsidized by tax savings.

All tax payable is deferred to retirement due to their being no Capital Gains Tax payable on a Retirement Annuity. Although a person may only draw a maximum lump sum of 1/3rd at retirement date from your Retirement Annuity, as it currently stands the, the first R500,000 withdrawn will be free from tax.

How can I make contributions to my Tax-Free and Retirement Annuity investments?

You can make contributions to your investments in a way that suits you. you can either setup a regular debit order, or you can make additional contributions as and when you have additional funds available, or a combination of the previous two options to ensure you maximize your contributions and tax benefits.

Retirement Annuities and Tax-Free Savings are designed to help you save before retirement, to ensure that you have a pool of savings to draw an income from once you retire. Make the most of the time you have, and the tax-benefits Retirement Annuities provide as you get one year closer to retirement.

If you would like to make additional contributions to your Tax-Free Savings or Retirement Annuity before the end of the financial tax year, and you are unsure if you have reached your maximum contribution limits, please contact your RWM Private Wealth Manager and they will be able to update you on your limits.