Is there any type of investment – with tax benefits similar to a retirement annuity – which allows you to cash in whenever you want?
A retirement annuity has always been the preferred way to get something back from the taxman. It still is…if you earn enough to have a tax problem.
But one of the reasons why many people don’t invest in one is because you can’t touch your money until you turn 55 (or become disabled, die, or suffer from ill health).
And even if you retire, become disabled or suffer from ill-health, you can’t get your hands on more than one-third of it. That’s unless the entire investment is worth less than R247,500 in which case you can take the entire amount in cash. Both the one-third taken in cash, and the annuity income taken from the remaining two-thirds, may attract tax.
The only other time you can cash in your retirement annuity, is if you formally emigrate or leave South Africa upon the expiry of your work visa. Yes you’re allowed to cash in your investment but not before paying the tax.
So here’s the secret sauce with a retirement annuity:
One, the contributions are tax deductible which is fantastic for anyone paying income tax.
Basically – between your pension fund, your provident fund, and your retirement annuity – you can contribute up to 27,5% of your retirement funding income but capped at R350,000 per annum across all three types of funds.
- Imagine being in the 41% tax bracket and having your government pay 41% of the contribution for you?
- Then there’s the fact that this investment is safe from creditors. Always a good thing, right?
- And then there’s the fact that your money grows absolutely free of tax. Oh, you didn’t know that the hard earned – and after tax, nogal – money you invest, is taxed? For instance, endowments are taxed within the investment itself. With a unit trust, the capital gains, the interest, and the dividends are taxed in your personal capacity.
Here’s how it works:
Let’s say you decide to invest all your money in a fixed deposit account at your bank.
Well, in 2017, if you’re younger than 65, the first R23,800 of interest earned in that year – as an individual – is tax-free. Earn a Rand more and that Rand is taxed at your marginal tax rate. In other words, up to 45 cents of your 100 cents might end up as tax.
“That’s okay”, I hear you say, “I’m invested in shares.”
The good news here is that you’re quite likely getting:
- Dividends paid back to you, and
- Growth in your capital
The bad news is that both of these are taxed.
- Local dividends are taxed at 20% – 20 cents out of every 100 cents, and
- The first R40,000 of your total capital gains is tax-free every year, BUT any capital gain earned over and above that gets taxed at up to a maximum effective rate of 18%. In other words, 18 cents out of every 100 cents you make. This tax only applies when you sell shares.
Can you see why many of the big earners have retirement annuities?
What if you want some of the same benefits but you’re not a big earner…yet?
Well there is an option. It’s called a Tax-Free Plan, and it works like this:
- You take your after tax money – in other words, the income you’ve already paid tax on – and you invest with someone like Old Mutual (Yip, today’s article is focused on Old Mutual and I’ll tell you why later).
- The very most you can invest in a tax year – that’s from the 1st of March every year, till the 28th of February in most years – is R33,000 a year (in 2017). That’s R2,750 a month.
- Over your lifetime, you may invest a maximum of R500,000. To get to this amount by investing R2,750 a month, would take just over 15 years. But watch out – if you invest more than R33,000 a year, or the R500,000 over a lifetime, then you will pay a penalty of 40% on the excess contributions. This can become a problem if you invest with more than one company, and you lose track.
- Your money is not locked in, and you can withdraw at any time without paying a cent in tax. But you can’t make a withdrawal and then think you can repay the withdrawal. Every reinvestment is seen as an additional contribution. And remember that all contributions are limited to R33,000 per annum.
- You pay not a cent tax on your interest earned, your capital gains, or your dividends earned.
- If you invest in an Old Mutual Tax Free Plan, your investment is paid directly to your beneficiaries upon your death, and no executor fees are payable. You might still pay estate duty though depending on the gross value of your estate.
Imagine you have four children.
You might also consider opening up an account in each of their names as well and invest R33,000 for each child- that’s R132,000 a year in tax-free savings. Surely that’s going to come in handy when it comes to university costs? Just be careful:
- Each child’s R500,000 individual contribution limit will be used, and
- There a possible donations tax implication if you have four or more children. That’s because any donations in excess of R100,000 is taxed at a rate of 20% (R33,000 x 3 children = R99,000 a year).
But there’s one massive advantage that a Tax-Free Savings Plan has over a Retirement Annuity
When investing, there are layers of costs. Any company offering Tax-free Savings Plans is only allowed, by law, to charge a fixed fee. This alone, is huge!
And if you really want to save big, then look at a Tracker fund which should have the lowest ongoing cost of all. That’s because there’s no active fund management involved. The fund simply tracks the index.
So getting on to Old Mutual
Old Mutual is geared to help you take out your own Tax Free Plan, with or without an adviser.
And when it comes to investment fund options, Old Mutual offers 31 choices:
- 4 tracker funds
- 7 Strategy funds
- 1 Volatility controlled fund
- 15 target funds, and
- 4 Extended funds
We’d advise you to make use of one of their advisers if you’re interested in knowing more. Yes, they’ll charge a fee for their service, but after all, who knows what the difference is between a strategy fund and a target fund?
Another big reason for using an adviser is because 12 of the funds are only available through an adviser.
But here’s the biggest reason to use Old Mutual in our opinion
All that’s needed to get started is R200 a month.
With some other providers, you’d be looking to invest a minimum of R500 a month.
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