Top up your RA for a tax break - but remember the new retirement fund regulations
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2012
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18
Jan
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The end of the tax year is a good time to maximise the tax breaks SARS allows on retirement annuities (RAs) by topping up yours with an additional contribution. Perhaps you’ve earned a bonus, or put aside money for a rainy day that never came. If to date you’ve contributed less than the maximum tax-deductible amount to an RA, you can use any additional cash to top up your RA and enjoy the full tax benefit, says Christo Terblanche, head of product development at Allan Gray.
However, if your RA doesn’t comply with the asset limits set out in the revised version of Regulation 28 of the Pension Funds Act (Reg 28), making an additional contribution may force you to bring it into line.
The Reg 28 revisions, which came into force on 1 April 2011, prescribe the maximum exposure your individual RA can have to certain asset classes. For example, there is a limit of 75% on equities, 25% on property, and 25% on foreign assets. “Reg 28 aims to ensure that each retirement fund member’s investments are adequately diversified,” says Terblanche.
If your RA complies with Reg 28, when you make an additional contribution you need to ensure your portfolio remains within the set limits. If it doesn’t comply, and you haven’t transacted on your account since 1 April 2011, an additional contribution would mean that you have to make your account compliant. If you don’t want to make your account compliant, you can open up a new account, linked to the same RA, for your additional contribution.
If you don’t have an RA, consider starting one, says Terblanche. “Astute investors won’t ignore the investment restrictions in Regulation 28. But the benefit offered by the government for accepting these restrictions is a significant advantage in tax efficiency.”
Each year, you’re allowed a minimum tax deduction of R1 750. Alternatively, you can contribute the greater of R3 500 less your allowable pension fund contribution; or 15% of your non-retirement funding income, to an RA tax-free. Any additional payments (over the 15% limit) can also be carried forward and offset against your future taxable income.
If you’re self-employed, or your employer doesn’t offer a pension or provident fund, your income is considered ‘non-retirement funding’. If you are a member of your employer’s pension/provident fund, your income is known as ‘retirement funding income’.
Investment returns earned on your investment over the time up to when you retire is also tax-free. At retirement, a minimum of two-thirds of the capital in your RA must be invested in a pension-providing vehicle such as a living annuity or guaranteed life annuity. This ‘transfer’ is tax-free. Your annuity income is taxed at your marginal rate, which, depending on your circumstances, may be lower than your tax rate prior to retirement.
Source: Claire Densham Communications
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