If you are self-employed, or your employer doesn’t offer a pension or provident fund, then all your income is non-pensionable.
For example, if you’re self-employed and earn an income of R800,000 per year, you can make a maximum tax-deductible RA contribution of up to R120,000 for the tax year ending 29 February. If we assume you have a marginal tax rate of 41%, your RA contributions could provide you with a tax rebate of about R49,200.
If you work for a company with a pension or provident scheme your contributions already have tax benefits. However, you can still invest in an RA to supplement your retirement savings and enjoy certain tax savings.
Let’s go back to the example above. If you reinvest your R49,200 tax rebate, you can effectively add to your retirement income without any additional outlay. Assuming that your income increases by a conservative 5% every year (and therefore so do your RA contributions), you can save an additional R2.1m over 25 years by reinvesting the full rebate you receive each year, assuming of course that the tax rebate remains unchanged. (Again, these assumptions are based on current deduction limits which are set to change on 1 March.)
If you achieved an annual growth rate of 10% on your investment, this could potentially boost the amount available to you at retirement by almost R7 million in nominal terms (i.e. without taking inflation into account). Of course this is just an illustration, with certain assumptions that could turn out to be valid or not. But it certainly does show the value of using tax rebates and reinvesting the money saved.
Remember that RAs also offer further tax benefits as the returns the fund manager/s achieve within an RA structure are not taxable. This means that no capital gains tax (CGT), income tax or dividend withholding tax (DWT) apply.
As with RAs, investment returns in a tax free savings account are not subject to income tax, CGT or DWT. However, your contributions are not tax deductible. You can invest a maximum of R30,000 each year and R500,000 over the lifetime of your investment in a tax free savings account. As these limits are fixed, you can’t replace any withdrawals you take.
To really get the full savings benefit of the tax rebate, you should remain invested for a period of ten years or longer. That’s when you really start seeing the compounding effect on the additional returns.
If you compare an investment in a tax free savings account with a standard taxed investment, it is clear that the longer you stay invested the better your outcome. For example, take an investor who makes an annual lump sum contribution of R30,000 at the beginning of each year, up to the R500,000 lifetime limit.
This is invested with a 50/50 split between equity and interest-bearing instruments, with a dividend yield of 3% and an interest rate of 8%. Over the life of the investment it achieves an annual growth rate of 12%.
