Wealth Planning, Retirement Annuities, Tax, and Immigration

In the current climate I get a lot of queries regarding Retirement Annuities. Many of my elderly clients are still working not because they want to but because they must, due to lack of retirement savings.

A retirement annuity (RA) is a retirement fund as defined in terms of the Pension Funds Act.

It is a tax effective investment vehicle designed for individual investors (as opposed to employees who contribute to a workplace retirement fund).

You can use the RA as a tax planning tool. The profit that remains in your business can be reduced at year end using your RA contributions.

When you are a sole proprietor, your RA is more normally more useful. Earnings are taxed according to your personal tax bracket based on your practice earnings as you and the business are the same entity. An RA becomes a direct deduction against your income and will reduce your tax accordingly.

As an Inc you will be earning a set salary monthly this means you can use your RA to receive a tax refund. The practice has paid PAYE on your behalf, the RA will then work as a tool to refund a portion of the PAYE that has been paid on your behalf.

Some important considerations of the RA

You can only retire from your RA from age 55 onwards (with the one exception being early retirement due to ill-health).

You can however withdraw before age 55, either on emigration, if you have gone through the formal financial emigration process with the SARB and SARS, or if the paid-up RA value is less than R7,000.

Many people seem to be unaware that upon withdrawals are subject to withdrawal lump sum tax. These withdrawal tables are available on the SARS website.

If you are considering emigration your investment and tax structure must be carefully considered. It is important to note that an RA is a retirement tool for South Africa and not for any other country. Should you immigrate, your RA will be subject to both tax and penalties and you will likely lose a fair portion of your savings, not to mention the 3 year wait to withdraw your RA post immigration.

The above however does not mean you should not save towards your retirement it just means you should use a different investment vehicle to save. These would be investments like offshore unit trusts or even offshore share portfolios.

How does an RA fit into your future wealth planning and tax?

Tax benefits: RAs qualify for the same tax incentives as pension and provident funds. You may deduct contributions to an RA fund up to 27.5% of taxable income or gross remuneration (whichever is the higher) for tax. The 27.5% limit applies to the aggregate of contributions to all funds (pension, provident and RA). The overall tax-deductible limit is R350,000 per annum. Contributions over the annual rand limits may be rolled over to future years but will be subject to the limits applicable in those years.

You can join as many RAs as you wish, but the tax relief is determined in aggregate, not in respect of each individual fund. Your employer may contribute to an RA fund on your behalf. They can deduct unlimited contributions, but those contributions will be taxed as a fringe benefit in your hands.

Summary

There will be an optimal amount that should be put away into your Retirement annuity for tax purposes.

This amount should be calculated by your accountant or broker.

There will also be an amount that will need to put away monthly to ensure that you are able to retire comfortably. This amount should be calculated and split between the various funds that fit into your future plans i.e. more offshore holdings if you are planning on immigrating.

Given the current economic climate it is a very good idea to start diversifying your investments to an offshore portfolio, whether are going to immigrate or not. Please chat to us regarding how best to deal with the diversification of your funds as well as the various taxes to be saved.