Should you top up your RA before the tax season ends?
It is ‘retirement annuity (RA) season’, any contributions you can get into your RA before the end of the month can count toward your tax deduction for this financial year. If you have been ignoring all that advice, advertising and appeals from your broker like the plague, I don’t blame you. I have been around long enough to be tainted by some of the appalling business practices around insurance company RAs (and company pensions) myself, some of which still hang around today. With all the investment options available now, is there a place for retirement annuities today?
With the exception of a tax-free savings account which is capped at R33,000 pa, there are very few tax-efficient investment vehicles out there. Endowments are not ‘tax-free’, they are taxed within the fund at 30%, so unless your average tax rate is well above this, and you have maxed out on your annual interest and CGT allowances, they aren’t going to give you much real tax relief (except of course being out of sight so out of mind). They do however work really well for investments in a Trust.
Before looking at how tax effective an RA can be, let me just put some caveats in place: In my opinion, never use an insurance platform, nor add to an existing RA you already have on an insurance platform (beyond that which you are contracted to do so). Why? There are still nasty things called ‘early termination penalties’ that they can impose on your investment when life happens and you dare to want to reduce or stop the contribution. These penalties are levied because insurance companies pay brokers all the commission on the policies, for years into the future, at the start of the policy. Use a LISP platform.
The government have started to limit the amount of contributions you can deduct off tax – now at 27.5% of your taxable income or R350k pa, whichever is the lower. Taxable income can include interest on investments, rental income or income from other sources like commission (but allowable expenses related to these, like home-office or rental expenses, must be deducted first). At least these days all retirement savings – pension, provident fund and RAs are all lumped together for this allowance – in the past, if you had a company pension, irrespective of how much or little it was, you could only claim a minuscule additional portion of your RA.