Retirement Saving |Retirement| Tax Planning |Retirement Tax save

Retirement Saving Tax Benefits:

The South African government offers numerous Tax benefits or tax incentives on retirement saving. The South African government realise that the South Africa does not have a culture of saving and therefore has introduced numerous taxation benefits. These include:

Retirement Funds

Retirement funds are usually offered to employees by responsible employers, industrial organizations and trade unions. Retirement funds are a major benefit to employees as you, the employee, and your employer contribute a percentage to the retirement fund.

The Main types of retirement funds are as follows:

Pension Funds

Your Pension Fund contributions up to 7.5% of your pensionable income (your basic salary without allowances) are tax- deductable. Your employer’s pension funds contributions are tax deductable up to 20%of your income. All your pension’s funds returns are Tax-free.

For even great capital payout in your later years you should as you pension fund if you can choose a higher contribution rate and also see if you can make additional voluntary contributions to the pensions fund while you are still working. This may seem like a massive sacrifice but you will be grateful when you retire.

On retirement you can take out up to 1/3 of the benefits of your pension as a lump sum; there are however tax exemptions. You must use the remained to buy a pension fund. Your pension is taxed at the marginal rate when you receive it.

There are two different types of Pension funds:

Pension Funds – Defines Benefit:

This kind of pension plan is calculated by your years of fund membership and together with your final salary. There is no defined risk that your saving will be sufficient to provide the pension.

Pension Fund – Defined contribution:

This can be explained by only what you and your prospective employer contribute to the fund. There may be a risk that you have not saved enough for retirement and this risk lies with the member and not the employer.

Provident Funds

Your contributions are made with after-tax money, so they are not tax-deductible, but the investment growth on the total contributions is tax-free. Your employer's contributions are tax-deductible up to 20 percent.

When you retire, you can receive all your savings from the fund, with your contributions added to the tax-free portion of the lump-sum tax rates. Only the contributions made by your employer and the investment growth are taxed, but at favorable rates.

Retiremnet Annuities

These funds are typically used by people whose companies do not offer occupational retirement funds or by members of occupational funds who want to supplement their retirement savings in a tax-efficient way.

RAs are available as both life assurance and unit trust-based products. Unit trust RAs are more flexible, because you can reduce or even stop paying contributions without a penalty being levied, whereas life assurance RAs are contractual and any reduction in your payments could result in a penalty being applied.

Your contributions to an RA up to 15 percent of your annual non-retirement-funding income (that is, income not used in funding pension or provident fund contributions) may be claimed as a tax deduction.

You can draw a pension only after the age of 55. As with a pension fund, you may take up to one-third of your benefit as cash, but you must buy an annuity with the balance.

Presevation Funds:

If, when you leave a retirement fund, you transfer your savings to a preservation fund, you can preserve both your money and the tax benefits. You cannot make further contributions to a preservation fund. If you want to continue saving, you will have to use another investment vehicle, such as an RA. There are two types of preservation funds: pension preservation funds and provident preservation funds.

To preserve the tax benefits, you must transfer your savings from a pension fund to a pension preservation fund or from a provident fund to a provident preservation fund.

You may retire from a preservation fund at age 55. The same pension, lump-sum withdrawal and tax rules for pension and provident funds apply.

The Retirement GAP!

When there is a short fall between what you have saved on the date on which you retire and the actual amount you need to retire and continue to live comfortable is called the retirement gap!

This retirement gap arises because people do not understand how their retirement funds determine their net replacement ratio (NRR)! Most retirement funds target a Net retirement ration of 75% - 80% of their final pensionable salary after 40 years of fund membership.

To top up your retirement savings, and to enjoy tax benefits on retirement savings, you will have to use a retirement annuity, which allows you to claim as a tax deduction up to 15 percent of your taxable income less your pensionable income.

The mismatch between basing your NRR on pensionable income and not your total income is only one cause of the retirement gap. Other causes are:

Starting to Retirement Save too Late:

If you will receive an NRR of 80 percent after 40 years of fund membership, you will receive an NRR of only 28 percent after 20 years, because you will have lost out on 20 years of compounded investment returns.

Not preserving your retirement saving:

Research shows that only 7.5% of retirement fund members retire with 40 years fund membership. Most members have between only five and 10 years of membership when they retire from their last fund. It can be assumed that most of these people failed to preserve their accumulated retirement savings.

Retiring to Early:

If you work for another five years, you can increase your retirement savings by up to 80 percent because of the effect of compounded returns. If you retire too early, you will reduce your NRR dramatically.

For any other TAX related Investment and financial planning advice please contact Andre Bottger (A Financial Advisor at Liberty Life in Cape Town)! He will be able to help you with your Wealth, Investments and Financial Planning.