Does The Taxman Help You Save For Retirement?

Tax-free savings products were introduced two years ago while retirement annuities – in some form or another – have been around for decades. How do they measure up in terms of helping you to save for your golden years?

- Rupert Giessing

With the end of the tax year on 28 February, now is a good time to remind ourselves again of the numerous advantages of saving for retirement through certain investment products. These investment vehicles have considerable tax advantages over discretionary products, where these benefits do not apply.

Specifically, we’ll be looking at the good old retirement annuity and then also tax-free investments, which were introduced in 2015 as an additional savings vehicle to encourage South Africans to save more.

Retirement annuities (RAs)

RAs have been around for as long as most of us can remember. They are basically private pension plans, specifically designed to help you save for retirement. They have evolved significantly over time into much more flexible and affordable investment vehicles from the more traditional life insurance products of old.

Investors can now make use of so-called “new-generation” RAs on linked investments platforms (LISPs). These are more flexible and far less expensive to administer, contributions can be made as and when the investor chooses (in the form of a lump sum or a regular debit order) without possibly paying any penalties for missing contributions, and there are also a wealth of underlying unit trusts available to choose from.

Benefits of saving through an RA

The first and most significant benefit is the tax deductibility of RA contributions. As from 1 March 2016 all contributions to pension, provident and RA funds are consolidated and are deductible up to 27.5% of the greater of remuneration or taxable income, capped to R350 000 annually.