2012 Peter Pyburn Retirement Annuity Advice
Retirement Annuity Saves Income Tax
If you are going to pay income tax, THEN READ ON!
You can contribute up to 15% of your declared annual income to your RA. You can also pay up to R 1,800 as an additional arrears payment.
Have you SAVED your full allowance for the year?
What are your expectations when you retire?
A comfortable retirement sadly eludes most South Africans. Statistics show that only nine out of every 100 South Africans retiring at age 65 have made adequate provision for their retirement. Dreams are but one thing; reality is, all too often, something entirely different.
Factors that contribute to inadequate retirement benefits are:
- Only beginning retirement planning at 50.
- Relying entirely on your company pension fund to provide you with an income after retirement.
- Changing jobs and spending your withdrawal benefit on a holiday or a new car. This is one of the most dangerous things you can do.
- Paying large outstanding debts such as your housing bond after retirement.
- Unexpected retrenchments.
You should start planning for your retirement when you receive your first pay cheque. Planning for your retirement should be seen as an ongoing process, not a once-off event.
How do you plan for retirement?
- Determine how much income you will require on retirement in real terms.
- Request a financial needs analysis (FNA) to determine what lump sum is required at retirement to provide this income, and what monthly contribution is required to provide this lump sum.
- Select the most appropriate vehicle(s) to achieve your retirement goals.
- Continually monitor your investments to ensure that you will meet your retirement goals.
The graph below illustrates the effect of delaying investing for your retirement. It shows how much you need to save per month starting at different ages to achieve the same results as paying R100 per month from age 20.
Putting away a little extra today, makes a BIG difference tomorrow.
When it comes to planning for your future, what you do today is what really counts.
Please call me NOW!!
How Retirement Annuities WorkSay your income is R300,000 per year.
You can contribute a maximum TAX-DEDUCTIBLE contribution of 15% of this income or R45,000 per year or R3,750 per month.
Your marginal tax rate on this contribution is 35%. That is R 1,313 per month.
This amount is that SARS is giving you back (by way of a tax-deduction) for saving into an RA!
Or looking at it another way, for every R1 you invest SARS is contributing 35 cents for you.
Therefore, you are actually contributing only R 2,437 from your pocket (R 3,750 less R 1,313).
The rest comes from SARS
So for just R 2,437 invested by you, YOU IMMEDIATELY GET R 3,750 invested into your RA.
That is an IMMEDIATE RETURN OF 54% - BEFORE YOUR INVESTMENT EVEN GROWS!!
A return you cannot beat!
But that's not all….
If your RA grows at say 10% per year, ANY OTHER INVESTMENT MUST GROW BY 69% to equal your RA.
This is because your actual contribution is less, as a result of the exemption from SARS.
You don't get the exemption with any other investment!
R1,000 grows to R1,100 - or a 10% return.
You paid only R 650 to get the same growth of R1,100.
That is a return of 69%!
Assumes only R1,000 invested and the contribution qualifies for a tax deduction.
No guarantees implied.
Why a Retirement Annuity offers you real benefits long before you retire.
You own your own business.
You don't depend on others to provide for your retirement.
Your future is in your hands.
BUT, if you do not plan for your future - WHO WILL?
A salaried employee has his pension provided for - you alone must provide for yours. A salaried employee is told when to retire - you chose your date. A company pension increases with salary increases - you must ensure yours does the same.
You need a flexible retirement plan that offers the best tax benefit whilst allowing you to vary the contributions during the term.
A Retirement Annuity offers you all of this.
Reap the full benefits of a lifetime of working for yourself!
10 WAYS TO SAVE TAX WITH A RETIREMENT ANNUITY
A RA is nothing more than a one-person pension plan.
You apply to become a member of an RA fund, which is approved as such by the Registrar of Pension Funds and the tax authorities.
No employer/employee relationship is required to qualify for membership.
RAs are the main savings vehicle for self-employed persons to accumulate funds for retirement in a tax-efficient way.
They are also popular as a top-up plan for salaried employees who belong to pension funds to close the income gap at retirement.
Smaller employers often choose RAs for their staff over traditional pension schemes, thereby avoiding the administration and responsibility involved in operating the latter schemes.
You know that contributions to an RA are tax-deductible up to a certain maximum, but do you know that an RA may actually provide you with an opportunity to save tax in 10 different ways?
These tax concessions apply to all natural persons , including each married spouse in their own right and are as:
- Contributions are tax-deductible up to a certain maximum (e.g. if you fall in the 40% maximum marginal tax rate, then the Receiver is sponsoring almost half of your contribution towards your retirement). For example, a self-employed person with a taxable income of R200 000 for the year can contribute R30 000 to an RA on a tax-deductible basis and thereby save R12 000 in tax.
- Disallowed contributions can be carried over to the next year of assessment and, if unused during the total contribution period, can be offset at retirement to increase the tax-free portion of the lump sum, the annuity or other income.
- The inside build-up of the fund is currently taxed at 9% on gross interest. This benefits anybody who pays income tax! If you have an all-equity RA no tax will be paid on the build-up, as dividend income and capital appreciation are tax-free.This is like having a tax-deductible share portfolio.Currently, RA's are NOT subject to CGT.
- Your lump sum on death or retirement is tax-free up to R300,000
- The balance of the tax-free lump sum is taxed very favourable rates.
- You can deduct a further R1 800 per year in respect of arrear contributions. All that is required to increase your deduction is to make an additional contribution of R1 800 in respect of a previous tax year in which you didn't claim your maximum allowable deduction. This extra contribution of R1 800 can then be claimed during the current tax year. This procedure can be repeated year after year in respect of years in which you didn't claim the full deduction.
- On death, any benefits paid out by way of an annuity are free of estate duty. (This provides a planning opportunity for the wealthy estate owner to make a large single-premium contribution to an RA to reduce his or her estate for duty purposes.)
- If you leave your employer and receive a withdrawal benefit from your pension or provident fund, you can preserve your retirement benefit transferring it into an RA fund tax-free.
- At retirement, you have a choice between a conventional annuity or an equity-linked living annuity. Assuming your risk profile justifies the decision, by choosing the equity-linked living annuity you can manage the income you receive (between 5% and 15% of the capital amount each year) and consequently also manage your income tax position.
- Most people experience a big increase in medical expenses once they retire. Thankfully, once you have reached age 65, your medical expenses become fully tax-deductible. An RA can be used to build up a fund for post-retirement medical expenses in a tax-efficient way. At retirement, although the annuity is fully taxable, to the extent that it used to cover medical expenses it is deductible again. It is therefore, in essence, tax-free.
However, surprisingly for many the biggest advantage of an RA may not be tax-related at all.
An RA is a disciplined way of saving on a regular contractual basis (not a "if I can spare it" kind) that can also be made to give guaranteed results. The fact that by law, the capital cannot be accessed before at least age 55, is often a blessing in disguise.
This means that you are more likely to reach retirement with some capital to produce a retirement income if you follow the RA route, unlike many other types of liquid investments which, experience shows, are raided for other purposes long before retirement.
The tax savings, combined with flexibility as to retirement dates and contributions and the choice of investment and guaranteed options, make the RA an ideal investment for retirement planning.
... by employing your wife and paying her a salary, with which she takes out an RA.
SAVE ON TAX AND RAISE RETIREMENT CAPITAL WITH YOUR OWN BUSINESS!
Do you want to…
Supplement your household retirement income? Receive a greater household tax-free lump sum at retirement? Lower your household tax rates at retirement? Invest internationally and hedge against the rand? Protect your investments from insolvency? Build up capital? Pay less tax now? Diversify your investments? Save, and legally avoid, estate duty?
If you answered YES to any of the above questions then we have the solution for you.
Employ your wife and pay her a salary - a maximum of R74,750 per annum - which is tax deductible for your business.
Your wife pays R11,212 per annum into an RA (15% of R74,750)
The remainder (R63,537.50) falls below the current tax threshold, and thus no tax is paid on her income.
For example: Susan Burger, aged 40, invests 15% of her annual salary in an RA for the next 15 years.
Contribution = R11,212 per year.
At age 65 she could have a retirement fund of more than R1,400,000!
Income paid to your spouse must be reasonable in relation to services rendered.
These figures are based on Feb 2012 tax rates for persons under the age of 65.
The figure is based on a growth rate of 8% p.a.
The investment amount increases at 6% per year.
Excludes inflation, based on simple compound growth
No guarantees implied
NOW, That's something to seriously consider!!
It is easy to lose sight of future costs like medical aid costs…
OR even how your retirement plan fits in with your ever-changing lifestyle needs and even your employment status.
What if you're forced to retire a few years earlier than you expected?
What if you find at age 60 that you haven't enough to retire on? It's then too late.
And what if you can't retire because you don't have enough?
Surely, it makes sense to do something NOW?
An additional investment today can buy you a whole lot of added peace of mind.
February is the end of your tax year.
Maybe you will have to pay in towards income tax?
IF THIS WILL BE THE CASE, YOU CAN REDUCE THAT LIABILITY BY USING YOUR RETIREMENT ANNUITY.
You can invest some of that income tax for yourself, not SARS!
You can "top up" your RA within certain limits.
Why not pay yourself your hard earned money instead of paying the Receiver?
So, talk to me NOW.
And if you do not have a RA, even more reason to call me.
As a certified financial planner, I would like to help you make sure that you will enjoy your retirement and make your life as comfortable and carefree as you dream it will be - no matter what the circumstances.
The sooner the better, because when it comes to financial planning only you can make the difference.
If you would like an indication of what you should be saving for retirement, please complete the RETIREMENT SAVINGS REQUEST FORM and mail it to me.
I will reply with some values for you.
Especially if you are concerned about Your Retirement Annuity.