Benefits of tax-free retirement savings
Only 6% of South Africans retire comfortably and can maintain their standard of living. Make use of a Tax-Free Savings Account for retirement to reduce tax payable on your investment.
People’s retirement needs vary greatly, but everyone will need to cover their basic living expenses. To pay for life’s expenses during your retirement – and maybe have some fun along the way – you need to set money aside now, and allow that money to grow so that you have sufficient income in your twilight years.
Tax-Free SAvings account for retirement
When to consider supplementing your retirement plan with a Tax-free Savings Account (TFSA):
- If you are below the age of 65 and earn less than R75 750 per year then your income is below the income tax threshold. You do not pay tax and will therefore not enjoy any personal income tax relief from contributions made to your retirement funds.
- If you’ve topped up your retirement savings to more than R350 000 per annum, you’ll begin to pay tax on any more contributions. A TFSA will allow you to supplement your retirement annuity with R500 000 tax-free in your lifetime.
- Contributing more than the deductible limits to your retirement annuity will cause you to lose savings to tax. If instead, you invest the extra contributions into a TFSA, you could save on tax and contribute to your retirement savings fund.
The benefits of a Tax-Free Savings account
- With a Tax-Free Savings Account, you will not be taxed on interest, dividends or capital gains. As these savings grow over time, you can also look forward to significantly greater returns.
- You can invest up to R36 000 per financial year (maximum R500 000 over a lifetime) into a range of asset classes. Should you invest the full R36 000 allowance each year, you would reach the maximum contribution rate of R500 000 within 14 years, but there is no limit on how much interest you can earn with that account.
- You can choose to invest in anything from a no-risk bank account to low-risk assets or high-risk equity portfolios, depending on whether your investment appetite is aggressive, balanced, moderate or conservative.
- You don’t have to commit to a specific investment amount or term, and there’s no limit to how much your investment can grow. But the real value of a Tax-Free Savings Account is that you have access to your funds at any time and that the amount you withdraw won’t increase your taxable income.
Retirement annuity instruments
Your TFSA isn’t enough for you to retire on, so you will need other ways to grow your retirement fund. There are additional investment instruments to enable this, but these will be subject to tax:
|Funds||Entry: Contribution||During: Investment Term||Exit: Withdrawal / Termination|
|Retirement||Deducted from taxable income||Not taxed||Subject to retirement tax|
|Discretionary Savings||After-tax proceeds||Interest and dividends are subject to tax||Subject to capital gains tax|
|TFSA||After-tax proceeds||Not taxed||Not taxed|
Get expert advice
Decisions around your long-term financial security should not be taken lightly – if you’re ever in doubt, speak to a professional financial planner.