Tax Free Savings
Tax-Free Savings Account is a savings account that allows you to save for both short-term or long-term goals without paying taxes on any of the growth or income you earn. In addition, you are not taxed on withdrawal or termination of the account and you have instant access to your money whenever you need it.
Advantages
- Grow your savings without any taxation
- Enjoy unrestricted access to your money. (It’s worth noting, though, that a long-term horizon is recommended to fully realise the benefit of compounding your tax-free return.)
- No initial fees, exit penalties or administration fees
- Stop contributing at any time, without penalties
- Choose from a range of funds to suit your investment needs – your fund choices don’t have to comply with Regulation 28
- You can open a tax-free investment for minors
Limitations
- Only individual investors in South Africa are eligible (trusts, companies, etc.)
- A regular income cannot be paid out – interest and dividends earned are automatically reinvested
- No protection against creditor claims
- A maximum of R36 000 per annum and R500 000 over your lifetime can be contributed
Tax-Free Allowance
You can invest up to R36 000 tax free every tax year (1 March to end February of the next year) and up to R500 000 over your lifetime. These limits are legally set and apply across all tax-free products you invest in (not per product). If you exceed them, you’ll pay a penalty tax of 40% on the additional amount invested.
All amounts you invest will count towards your annual and lifetime limits regardless of any withdrawals you make. In other words, if you invest R36 000 this tax year and then withdraw some or all of your savings, any further investment during the tear tax year will be taxed 40%.
Retirement Savings
A retirement annuity is a tax-effective retirement investment, which is designed for individuals who want to save towards their retirement. This may be in addition to your existing pension or provident funds that you already participate in through your employer.
All or a portion of your contribution may qualify for a tax deduction thereby reducing your tax bill, while the growth in the retirement is tax free. Additionally, because the money can only be accessed at retirement (from age 55), it helps you improve your investment discipline. Your funds are protected from creditors to safeguard your retirement savings.
RAs are by far the most tax-efficient investment you can make. Not only are you allowed to deduct your contributions to your RA from your annual taxable income (up to certain limits), but the growth in your RA is 100% tax-free.
Retirement Annuity contributions are tax deductible under S11(k) of the income tax act. Contributions are deductible to a limit of 27.5% of taxable income, capped at an annual limit of R350 000. Contributions in excess of the annual limits will be rolled over to future years.
What is tax rebate on a retirement annuity?
Unlike your medical aid contributions, your RA contributions qualify for a tax deduction or a tax refund rather than a tax rebate.
Although you are free to contribute as much as you want to your RA, the retirement annuity tax relief for the 2017 tax year is set a maximum rate of 27,5% of income, subject to a rand cap of R350,000. This R350,000 rand cap (and the 27,5% limit) however includes the contributions made to a workplace pension or provident fund. If you contribute over the limit: SARS keeps a record of all unclaimed contributions, and allow these in future years (subject to the prevailing limits in those years).
To calculate your retirement annuity tax relief, you must multiply the amount of your contribution by your marginal tax rate (the highest tax rate applied to any part of your income). So if you contribute, say R12,000 per year, and your marginal tax rate is 25%, then you would get a refund of R3,000. If your marginal tax rate was 41%, your refund would be R4,920.
Endowments
An endowment is an investment policy (with a minimum five-year term) with tax advantages for affluent individuals and their trusts (with natural beneficiaries only).
Endowments offer tax benefits to investors with a marginal tax rate of more than 30%, as it will reduce the tax payable on your investment growth. It also helps you to save with discipline, as you have a minimum investment period of at least five years.
What is the basic structure of an endowment?
- It has a restricted investment term of a minimum of five years
- Allows you to make a lump-sum investment or recurring contributions
- The investment is taxable in the hand of the investment life company; and
- Depending on the platform you invested on you can choose to invest in a combination of unit trusts and can switch freely between these at any point during the investment period
- Endowments are taxable in the hands of the investment life company and taxable at a rate of 30%
- If your marginal income tax rate is higher than 30%, you can benefit from tax savings in an endowment
- These investments can be used for estate planning purposes as they are payable to your nominated beneficiaries on death; and
- The first five years is the restricted term but after that, you may withdraw from your investment at any time, or schedule regular withdrawals with no tax implication
Can I withdraw from my investment if I need it?
You may only withdraw money once during a restriction period but could be subject to penalties. The restricted period can be extended as per the 120% rule. When you are no longer in the restriction period, you may withdraw any amount, at any time. You may also set up a regular monthly withdrawal.
What is the 120% rule?
Your five-year restriction period may be extended if you invest more over one year than 120% of your investments over either of the past two years.
Why are endowments beneficial for estate planning purposes?
Endowments allow you to nominate beneficiaries which means on your death the money invested will be payable directly to the beneficiaries and they are not required to wait for the estate to be wound up. You can also nominate a beneficiary for ownership to inherit the investment and become the new policyholder if you die. No executor’s fees will be charged on the amount paid out, but it will form part of the estate for the calculation of estate duty.
What are the main differences between investing in an endowment vs a unit trust?
Endowments allow you to nominate beneficiaries which means on your death the money invested will be payable directly to the beneficiaries and they are not required to wait for the estate to be wound up. You can also nominate a beneficiary for ownership to inherit the investment and become the new policyholder if you die. No executor’s fees will be charged on the amount paid out, but it will form part of the estate for the calculation of estate duty.
Liquidity:
- Endowment: minimum investment term five years but after five years the funds are available to be withdrawn with no tax implications
- Unit trust: can withdraw at any stage
Tax benefits:
- Endowment: Yes, for individuals that have a marginal tax rate of higher than 30%
- Unit trust: No tax benefits tax is triggered at the withdrawal stage from a unit trust
Estate planning:
- Endowment: You can nominate beneficiaries to immediately receive the money or to take ownership of the investment if you pass away
- Unit trust: In a unit trust investment, your money will be paid into your estate
Are there direct offshore endowments available?
Yes, there are offshore endowments available and they follow the same structure as a local endowment.
Upon your death, the investment will be paid to the nominated beneficiary or they can decide to take ownership. The beneficiary is not required to bring the funds back into South Africa but can get it paid into an offshore bank account as long as the account is in the name of the beneficiary.
What is the Retirement Annuity Plan?
The Retirement Annuity Plan is a tax-effective retirement investment, designed for individuals who want to save towards their retirement which can be used as a stand-alone retirement savings plan or taken in addition to pension savings from your employment.
Benefits include tax-deductible contributions, tax benefits whereby a retirement annuity is exempt from Capital Gains Tax, Interest Income tax, and Dividend taxes, a retirement option whereby one-third can be taken in cash, with the other two-thirds invested into a Living Annuity that will pay you an income, a cash-out– option to withdraw 100% of your investment before the technical minimum retirement age of 55, no unexpected fees which are exempt from estate duty and executor’s fees and flexibility by contributing whenever you want, with no penalties.
What is a Living Annuity?
A Living Annuity is a retirement investment plan aiding a regular income after you retire.
One can invest their retirement savings into a living annuity and choose an income from a percentage range between 2.5% and 17.5% receiving either monthly, quarterly, bi-annual, or annual income payments.
What is a Linked Endowment Policy?
A Linked Endowment is a tax-efficient investment that assists one in creating personal wealth and offers estate planning benefits.
The endowment policy has a minimum investment period of five years.
When incorporated into your estate planning, your beneficiaries will receive the benefit immediately on your passing. Benefits include paying less tax with tax benefits and reduced tax rates, additional liquidity with access to multiple policies, access to money when you need it with one withdrawal available to you during the first five years.
What is a Fund Endowment?
A Fund Endowment is an investment solution that enables savings with tax benefits from reduced tax rates and policy proceeds paid from net tax, one free withdrawal within the first five years or unlimited withdrawals after the five-year period and bolstering your estate planning by including other lives assured on your policy and nominating beneficiaries.