By Jaco Prinsloo, Certified Financial Planner at Alexander Forbes Financial Planning Consultants
The benefits of saving are well known, as are the tax benefits offered by tax-free savings accounts (TFSA) and retirement annuity funds (RA). But what is unclear is which savings vehicle is better. Before we look at what the benefits of each, let’s look at factors to consider when choosing between a TFSA and an RA.
What is the difference?
The TFSA was introduced by the National Treasury to encourage South Africans to save in an easy, flexible and affordable way for future expenses and long term investment goals. To allow self-employed individuals and investors facing a retirement shortfall to save in their personal capacity, specifically for retirement, RA’s were created.
The tax benefit
Both TFSA’s and RA’s allow you to grow your savings tax-free, meaning there is no interest, dividend, income or capital gains tax payable on the investment growth. The tax implications on contributions and withdrawals are, however, quite different.
Contributions and withdrawals
With a TFSA, you can start from saving as little as R250 per month or make a lump-sum contribution of up to R33 000 per tax year for 15 years up to the lifetime limit of R500 000. Any contributions over the limits are taxed at 40%.
Unfortunately, there is no tax saving on the contributions you make to TFSA’s, but you can withdraw your savings as a lump sum or as a monthly income tax-free. There is no minimum investment period, but the penalty for withdrawing your funds is that any funds withdrawn cannot be replaced and permanently reduce your R33 000 annual and R500 000-lifetime limits.
An RA allows you to legally reduce your income tax by your contributions with a maximum up to 27.5% of your taxable income or R350 000 per tax year. The tax deduction effectively acts as tax savings rewarding you for making provision for your retirement. Although there are no contribution limits, any non-deductible contributions will be rolled over and deducted in the following tax year.
From the age of 55, you can retire and convert your RA savings into an income in the form of an annuity. At least two-thirds of your RA has to be converted into an income if the fund value is more than R247 500 at retirement. The income from the annuity is subject to income tax. The remaining one-third can be taken as a cash lump sum. Once in your life, you will receive R500 000 tax-free, and the balance will be taxed on a sliding scale of between 18-36%.
Both TFSA and RA’s have access to multiple asset classes eg, local and global cash, bonds, property, and shares. To protect investors, the RA’s are regulated by the Pensions Fund Act, which includes Regulation 28. With the restrictions of Regulation 28, there are certain limits on where and how much you can invest. For example, you can only invest 30% offshore and up to 75% in company shares. The TFSA can be any one of a range of underlying investment vehicles governed by their respective laws. It is not subject to Regulation 28, which means you can invest where you want and as much as you want within the limits in any asset class.
Creditors and Estate duty
An RA protects your savings from creditors and estate duty by distributing your savings directly to the nominated beneficiaries once approved by the trustees of the fund. Any unclaimed deduction made after 1 March 2015 to your RA may be included in your estate. A TFSA offers no protection against creditors, and if invested in a life policy, it will be paid directly to the nominated beneficiaries on death; otherwise, it will be paid to your estate. If your estate is worth more than R3,5-million estate duty could be payable.
The better option?
If you are paying tax on your income, are comfortable with Regulation 28 and can afford to keep your money invested until at least the age of 55, an RA might be the better option because of the tax-saving on the contributions you receive.
If you want to invest more in a specific asset class like offshore equity to increase your global exposure, and want access to your funds, a TFSA might be the better option due to the flexibility the investment offers.
Why not use both?
Combining an RA with a TFSA reduces your income tax while saving and provides you with tax-free withdrawals on withdrawal. This strategy also allows you to escape the restrictions of Regulation 28 by making use of the TFSA flexible asset allocation to increase your total offshore or specific asset class exposure based on your investment goals.
Asking which investment is better might be the wrong question as both the TFSA and the RA offer unique benefits that should be included in your overall investment strategy. The choice will depend on you, your circumstance, and your investment goals, and consulting a certified financial adviser will help guide you. Whichever option you choose, by choosing to save, you have already made the right choice.
WHAT TO DO WITH YOUR LIFE SAVINGS, RETIREMENT AND INSURANCE POLICIES WHEN EMIGRATING
By Renier Hugo, Alexander Forbes Certified Financial Planner
With South Africans increasingly opting to live abroad, a hot topic is the issue of what to do with your life savings, retirement, and insurance policies when emigrating.
New legislation, coming into effect in March 2020, means that South African tax residents living and working abroad will be required to consider whether they should emigrate from South Africa in order to avoid having to potentially account for tax in two countries.
A new term known as “financial emigration” has crept into people’s vocabulary. This is no different from the term “emigration” and the rules which attach when a person takes the steps to emigrate. One needs to understand the consequences of emigrating to another country on one’s financial products, such as long-term insurance policies, investments and pre-retirement money.
Life cover – You have the option of cancelling your life cover. Depending on the policy of the particular insurer, you might have the right to continue with the cover depending on whether the risk has changed for the insurer. You should take advice on this aspect. If you can it might be worthwhile to keep the current cover especially if you were underwritten when much younger or healthier. Your premiums will still have to be paid from a South African bank account. Some South African insurers currently sell life insurance that pays out in dollar or pounds; or life policies that pay out in any country abroad. These products may well be worth looking into before emigrating.
Disability and Income Protection – Care must be taken here. Assuming the policy can be continued, there may be certain exclusions within the terms and conditions when moving abroad.
Retirement Annuities – The usual restrictions of not being allowed to withdraw before age 55, as well as the one third maximum cash lump sum withdrawal, with the rest to buy a pension, does not apply. When officially emigrating, a member of an RA may withdraw the full capital amount.
Preservation Funds – The same applies to members of pension and provident preservation funds – a full withdrawal is allowed upon emigration.
Employer pension or provident funds – there is no restriction on withdrawal out of an employer pension or provident fund if a person decides to emigrate before normal retirement age.
Unit trusts and shares – regardless of whether you make the financial decision to sell these, there will be a tax consequence on emigration, so it is important to take advice.
Living Annuities – With regards to living annuities, you are unable to withdraw the capital even if you have formally emigrated. The income will continue to be paid out into a South African bank account, and from there the annuitant can choose to transfer it offshore.
Before making the big move abroad it is always wise to consult your financial adviser, as well as a South African emigration specialist who can analyse and give advice on your unique and personal circumstances. One should also obtain tax advice to understand the tax treatment of financial products following emigration.
THE END OF YEAR TAX CHECKS THAT COULD SAVE YOU THOUSANDS
Charlie Reading, Founder and MD of Efficient Portfolio
After HMRC’s tax return deadline at the end of January, it can be tempting to drop your guard, believing that your new tax bill is a long way away.
It’s true, you’ve got a whole year until the next bill is due. What most don’t consider, however, is that there is a range of checks that you can do reduce that bill significantly.
Astute investors make use of their tax-free allowances every year and save thousands of pounds in the process. With such massive savings on the line, it’s a strategy to certainly consider.
With that, here are some easy checks and tips from Charlie Reading, Founder and Managing Director of Efficient Portfolio chartered financial planners, that could start you on your way to a much leaner tax bill:
1. Maximise Your ISA Allowances
Good returns, flexibility, diversity and tax efficiency should be key components in your financial strategy, and the ISA helps to deliver all of these. Historically, ISAs have been at the cornerstone of tax-efficient saving and are often referred to as one of the essential steps in your strategy, as they can help your wealth grow without you being penalised by heavy tax charges. They are an incredibly useful way of saving, and, as such, it is generally encouraged that people take advantage of their benefits. However, the ISA allowance is offered on a ‘use it or lose it’ basis, so if you fail to maximise it, you can’t make up the funds later on.
Up until 5th April 2020, you can contribute up to £20,000 into an ISA, and a further £20,000 from 6th April 2020, thereby sheltering up to £40,000 per person, as long as you’re over 18.
2. Top Up Your Pension While You Still Can
At the time of writing, the highest level of State Pension you can receive is £129.20 a week, which is frankly a paltry sum to live on. That’s why saving for the future is so important. It might seem wise to enjoy life now and worry about retirement later, but you’d only be damaging your future quality of life.
Pensions are a highly tax-efficient way of saving and now offer a great deal of flexibility in retirement, as when you retire you can gain access to 25% of your pension pot as a tax-free lump sum, with the remainder taxed at your marginal rate.
The current pension annual allowance is set at £40,000, so if saving for your future is a priority, it is worth investigating which pension is right for you, sooner rather than later.
3. Protect Your Estate from Tax
Inheritance Tax (IHT) is a concern for people from all walks of life. If you are hoping to leave a legacy to your loved ones, the last thing you would want is for that legacy to be taxed at 40% and lost to the Government.
One simple way of combatting this is to consider using your annual IHT allowance. During your life, you are allowed to give away £3,000 per year without incurring any IHT charges upon your death. There are of course downsides to this, in that you lose all access and control over the money, but it may be a tax-efficient strategy to consider.
4. Don’t Overpay Your Capital Gains Tax
The final tax consideration at this time of year is Capital Gains Tax, which is also given on a ‘use it or lose it’ basis and is currently set at £12,000. The issue of Capital Gains Tax is most acute if you hold investments which have grown above your tax-free allowance.
To ensure you make the most of your Capital Gains Allowance, it is generally recommended to sell down a portion of your portfolio to realise the growth made, but only enough to maximise your allowance, is the most prudent strategy.
These funds can then be used to fund any outstanding allowance on your ISA, for example. The advantage of doing so is that by placing your money from a taxable to non-taxable environment you have the potential for further growth, and you benefit in the longer term by potentially reducing a future bill.
There’s plenty of time left before the taxman comes knocking once again, but there’s no better time than the present to start looking into how you can save you and your business thousands of pounds simply through tax allowances you might not have previously been aware of.
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