Dear reader,
Thank you for your query.
First and foremost, I’m going to begin off by taking a detour from the above questions by briefly contrasting a retirement annuity and an endowment coverage. These two investment insurance policies supply tax advantages in a distinctive means; nevertheless, they differ distinctively in tax remedy.
Endowments present tax benefits to buyers with marginal tax charges above 30%, decreasing the quantity of tax due on the expansion of your investments. Furthermore, endowments promote self-discipline as a result of the investment should be held for a minimal of 5 years. The investment is taxable within the arms of the investment life firm however its illiquidity due to the predetermined five-year lock-in time. In case of monetary emergencies, there are restrictions on withdrawals made earlier than the requisite five-year maturity.
In essence, in case your marginal tax price is greater than 30%, an endowment coverage makes significant sense as it’s taxed inside 30%.
Retirement annuities are a tax-saving car the place your taxable earnings is lowered as much as a set restrict, as spelt out within the Income Tax Act. Within a given yr, contributions are tax deductible as much as a most of 27.5% of taxable earnings or remuneration out of your employer, with a R350 000 annual ceiling.
Additionally, contributions in excess of the stipulated limits can be used to decrease potential taxes due on money lump sums taken previous to or at retirement age, in addition to to decrease the taxable part of your residing annuity earnings in retirement. Subject to the yearly limits, contributions made immediately by your employer are additionally taxable as fringe advantages in your arms; nevertheless, the contributions are additionally tax deductible at your disposal however are topic to the above-mentioned allowable annual limits. Coupled with that, excess contributions also can be carried over and deducted within the subsequent tax yr thus decreasing your tax legal responsibility.
Based on the above, in my opinion, I would fairly counsel the next investment choices for your excess contributions:
Retirement annuities
Continue investing in a retirement annuity for the next causes:
- Upon withdrawal of a money lump sum previous to or at retirement age, the excess contributions are tax deductible, thus decreasing your tax legal responsibility.
- Carried-over excess contributions will scale back the tax payable in your residing annuity.
- By nature, tax cost in your proceeds is deferred till retirement, thus permitting your investment to compound tax-free and undisturbed.
Retirement annuity and endowment
Allocate the excess contributions equally between the retirement annuity and endowment coverage utilizing a debit order facility. With regard to the latter, after 5 years, the proceeds from an endowment coverage are exempt from private earnings tax in your arms. Lastly, an endowment would be vital in case your marginal tax price is greater than 30%.
Tax-free financial savings account:
Another various would be to position these excess contributions into a tax-free financial savings account. Interest, dividends, or capital features earned will be tax-free in your arms. The development of your investment and any withdrawals out of your account are due to this fact not topic to taxation. However, the annual allowable contribution restrict is R36 000 per tax yr, with a lifetime contribution most restrict of R500 000.
Unit trusts
I would select to deploy these excess funds into unit belief investments. Unit trusts present flexibility, diversification, capital development primarily based in your danger tolerance and investment technique, liquidity, and benefits for property planning. These investments can increase your retirement earnings relying in your investment horizon, but it surely ought to be famous that withdrawals or switches from the sort of investment could end in capital features tax.
Direct offshore
Finally, you may take into consideration investing the excess contributions offshore. Offshore investments will let you spend money on international forex denominated (USD, GBP, CHF and so forth) underlying funds. The investment advantages from the efficiency of the underlying funds and the change price fluctuations.
Minimum investments begin from R20 000 to R50 000, relying on the product supplier you select. It’s essential to know that when making direct investments offshore, you may solely make investments as much as R1 million with out making use of for a tax clearance certificates; any quantity invested above R1 million requires tax clearance from Sars. There is an R11 million annual cap on the quantity you may make investments overseas. When switching and withdrawing, this might end in capital features tax.
We hope that the above solutions your questions.
The aforementioned relies on private opinion and shouldn’t be taken as recommendation. We urge you to talk together with your monetary planner and tax practitioner for particular recommendation tailor-made to your monetary scenario.