A great question and if you are thinking it, you are already ahead of the game as your financial future is clearly on your mind.
Great news as there’s a way to get tax back annually from SARS as well as building up a source of tax free income for your retirement years.
It’s called the OUTvest Retirement Annuity (RA) and the OUTvest Tax Free Plan (TFSA) and when used together creates smart tax efficient investing.
Oh, and it is easy to do! No need to run through a mountain of paperwork either. Simply log on to www.outvest.co.za or download the OUTvest app and set these investments up from the convenience of your own home.
A Retirement Annuity is best suited for those that have a long-term investment objective with the goal of investing to provide an income (annuity) at retirement after the age of 55 years.
The law allows an investor to deduct contributions to retirement funds (pension, provident and retirement annuities) of up to 27.5% of their taxable income or gross income whichever is higher to qualify for a tax deduction. This 27.5% limit is not per retirement fund but cumulative (aggregated) across all retirement funds.
There is an annual maximum tax deductible threshold of R 350 000, however all contributions over this threshold can be carried over and used in future years, limited to the applicable restrictions in those years.
A tax free savings account or TFSA allows you to save a maximum of R 36 000 p.a. in a tax year (1 March to 28 February), without ever having to pay tax on any withdrawals or growth made within the TFSA.
In fact there is absolutely no tax payable in a TFSA if you don’t investment more than R 36 000 in a tax year. If you had R 1000, R 10 000, R 100 000 or even R 1 000 000 (one day) in a tax free account or plan as we like to call it, you could withdraw it all without ever paying a cent to the tax man
Consider the following:
Jack, a 35 year old male, wants to retire at age 65. His only source of income is his salary of R 325 000 per year that he earns from his employer.
He makes no contributions to any other retirement funds (Pension or Provident).
He heard about the power of having a Tax Free Savings Account and a Retirement Annuity as part of a solid tax efficient financial plan.
Jack is able to contribute the maximum tax free amount to his TFSA on an annual basis. For purposes of the exercise, we will assume that the current R 36 000 annual limit remains as such until Jack reaches his retirement age of 65, and that Jack makes a full contribution each tax year to his TFSA .
Jack also contributes R 2 000 per month with an annual contribution escalation of 6% to his Retirement Annuity until he is 65.
By contributing to his RA in the first year (2021) Jack managed to get a cool R 6 410 in cash paid back to him from SARS. This was based on a salary of R 325 000, with R 24 000 contributed to his RA and using the 2021 Tax brackets.
For purposes of the example and to keep things simple, we assume that every year Jack’s salary increases by inflation and that he only earns a salary, does not make any contributions to other retirement funds except his RA, and that the tax brackets remain relatively stable over time.
So in essence Jack should get tax back (cash in his pocket) every year from SARS until he eventually reaches his retirement age of 65. Tax back every year to fund holidays, fishing gadgets and other hobbies that Jack so enjoys.
Let’s wind the clock forward to the year 2051……
After 30 years of contributing to his RA, Jack has managed to save just on R 11 290 00 in time for his 65th birthday. (Happy Birthday Jack – nicely done)
Jack’s investment in his TFSA has also grown handsomely totally just on R 5 801 000 at age 65.
At 65 years of age due to diligent smart tax efficient investing Jack does the following:
Jack stops contributing monthly to his RA, and leaves the R 11 290 000 to grow further in the RA.
At 65 he did his math and found that he could comfortably live off R 35 000 p.m. and does not foresee the need to increase this amount annually. i.e. He plans to withdraw R 35 000 p.m. from his TFSA until the money runs out.
The entire monthly amount that he draws directly from his TSFA is completely tax free. Yip he does not pay a single cent in tax on the R 35 000 p.m.
He chooses a low risk fund within his TFSA (like cash) thus limiting the risk of loss. Let’s assume that his money in the TFSA does not grow or lose money (remains stable). He can effectively then draw R 35 000 pm for roughly 13 years before he draws the entire investment down, i.e. has nothing left in his TFSA
Another 13 years on...
When the TFSA finally runs out of money Jack is 78 years old. As Jack left his RA to grow over the last 13 years the fund value grew from R 11 290 000 to a cool R 37 460 000.
Now Jack (78 years old) retires from his RA and invests in a Living Annuity that provides him with a monthly income of R 60 000.
This R 60 000 will be subject to taxation but as Jack is now over the age of 75 he has a number of additional tax rebates available to him to help reduce his tax liability, that he did not have under the age of 75.
He has also managed to build up a substantial amount of money to fund a Living Annuity and as such will in all probability also have money left over to leave to his beneficiaries.
Jack was able to:
- Get tax back annually from the taxman during his working career
- Live tax free (off the tax grid) for a number of years from his TFSA at retirement
- Defer retirement from his RA by a number of years and thereby giving his RA more time to grow, securing his future and that of his beneficiaries in the process
A Retirement Annuity and a Tax Free Savings Account were exclusively designed to help South Africans take maximum advantage of tax efficient investing, and when done right the rewards are great.
Talk to one of our skilled OUTvest financial advisors if you would like to know how you too can beat tax and put more money in your camp. Visit www.outvest.co.za for more.