The best preparation for the future is now
As we are approaching the end of 2020 tax year (29 February), this serves as a good opportunity to consider topping up on your retirement annuity. Retirement funds offer great tax benefits as the government offers various incentives to encourage retirement savings.
The deductible contributions are limited to 27.5% of the higher of your remuneration or taxable income, capped at R350 000.00 per annum. The calculation can be technical and it is advisable to consult a Tax Practitioner should you need assistance.
The benefits of contributing towards a retirement annuity include the following:
- Contributions towards a retirement annuity reduce your taxable income. We will use John as an example to show the calculation:
John’s taxable income was reduced from R500 000 to R362 500 due to contributing towards a retirement annuity giving him a tax saving of R46 461.
2. Any disallowed contributions for the current tax year are not forfeited but can be carried over to the following years of assessments, subject to the limits applicable in those years until they have been utilised.
Any unused contribution can be carried over and utilised at or after retirement.
3. Growth within the fund is taxed at 0% meaning that any capital gains, dividend withholding tax and interest earned accumulates in the fund and is not reduced by the tax. The growth in the fund is compounding tax-free. The investment value of a retirement annuity might be potentially higher than that of a discretionary unit trust in the long run.
It is important to note that after retirement, your annuity income will be taxable in your hands.
4. A retirement annuity will not form part of your dutiable estate. However excess contributions not allocated in the previous tax years can form part of your dutiable estate.
On the death of the member, dependents or beneficiaries have various options that will be addressed in a future article.
5. A member will not have access to the funds until the age of 55 (locked in) except on formal emigration from South Africa, disability or if the total fund value is below R7 500 ensuring that retirement savings are availed only at retirement.