Investing

Two easy ways to pay less tax

As the tax year comes to an end, it is the ideal time to take advantage of potential tax savings to maximise your savings and investments.

Asset manager Ninety One recently highlighted the importance of retirement annuities (RA) and tax-free savings accounts (TFSA) as a way to reduce your tax burden.

“If you have some extra funds available, consider adding to your savings in a retirement annuity or tax-free savings account, thereby enjoying the significant tax benefits these products offer,” the asset manager said.

RAs are a powerful tool for tax efficiency and can be seen as “gifts from the taxman”.

For example, if you’re in the 45% tax bracket and contribute R100,000 to your RA, you effectively pay only R55,000 of that amount, as SARS covers the balance.

Although tax is applied when funds are withdrawn at retirement, the tax burden is often lower due to tax-free portions of the lump sum and rebates available to individuals over 65 and 75.

On top of this, if your contributions exceed the annual tax deduction limit – 27.5% of income or R350,000, whichever is lower – the excess rolls over to the next tax year.

This ensures you continue to benefit in future years or even after retirement. These excess contributions can also benefit your beneficiaries, as they may receive the unused amounts tax-free upon your passing.

Beyond the immediate tax savings, RAs offer significant estate planning benefits, Ninety One explained.

They are exempt from estate duty, although excess contributions received as lump sums may be included for estate duty purposes.

However, the growth on these contributions remains exempt, reducing the taxable value of your estate over time.

In addition, investments within an RA grow tax-free, as no income tax, capital gains tax, or dividend withholding tax is applied. This allows for enhanced compounded growth over the long term.

Ninety One

According to Ninety One, RAs also help enforce disciplined savings, especially since the two-pot retirement system was introduced in September 2024.

This system allows limited early access to savings while preserving the majority for retirement.

The savings are split into three components: vested, savings, and retirement pots. Withdrawals are restricted to the savings component, with the remainder preserved until retirement age.

RA savings are also protected from creditors, which ensures that your funds remain secure for retirement.

There are some considerations when investing in an RA. Regulation 28 imposes limits on how your RA funds can be allocated, ensuring diversification and risk management.

In the event of the investor’s death, the Board of Trustees decides how the benefits are distributed among dependants or nominees, as per section 37C of the Pension Funds Act.

Additionally, liquidity is limited, with access to funds restricted before age 55 unless under specific circumstances outlined in the Income Tax Act.

Ninety One advised that TFSAs are an excellent option for those seeking tax-free growth and flexibility.

These accounts are exempt from tax on interest, dividends, and capital gains, making them ideal for long-term savings goals.

Unlike RAs, TFSAs have no withdrawal restrictions, although replenishing withdrawn funds will count towards your annual and lifetime contribution limits.

This feature makes them particularly useful for goals like funding a child’s education, though care should be taken to avoid exceeding the R100,000 annual donations tax exemption.

TFSA contributions are capped at R36,000 per year, with a lifetime limit of R500,000.

This means that if you invest the maximum amount every year, it will take you about 14 years to reach your lifetime limit.

Exceeding these limits results in a 40% penalty, so it’s essential to plan contributions carefully to maximise the benefits.

“Investors typically only realise the tax benefits of a TFSA after 10 years, so it’s important to take a long-term view,” Ninety One Investment Marketing Manager Leone Hitge said.

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