Advertise Here
Icon

Directory

IconAlternative Investments
IconAsset Managers
IconAssociations and Institutes
IconBBBEE Consulting and Verification Agencies
IconConsumer Protection
IconCorporate Governance
IconCredit Bureaus
IconFinancial Planners
IconInvestment Consulting
IconLinked Investment Service Providers
IconListed Equities
IconOmbud
IconOnline Share Trading
IconParticipation Bond Managers
IconProperty Unit Trusts
IconPublications
IconRegulatory Authorities
IconStock Exchange
IconUnit Trust Fund Managers
IconWellness Programs
Advertise Here
  Subscribe To »

COMPARING THE BENEFITS OF A TAX FREE SAVINGS ACCOUNT AND A RETIREMENT ANNUITY FUND

Published

2020

Thu

30

Jan

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 There is no minimum investment period, but the penalty for withdrawing your funds is that any funds withdrawn cannot be replaced and permanently reduce your R33 000 annual and R500 000-lifetime limits.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%.

 

Investment products

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.

 
Source: Lauren Mendoza CORPORATE IMAGE
 
« Back to previous page Print this page » |
 

Breaking News »

Disease and downgrades: Diary of a bad year for SA

Adrian Saville, Chief Executive, Cannon Asset Managers   30 March 2020: Moody’s finally dropped the sword on South Africa on Friday evening, following in the steps of fellow ratings agencies S&P ...
Read More »

  

Moody’s downgrade and what it means for investors

Maarten Ackerman, Chief Economist and Advisory Partner, Citadel   30 March 2020: The Moody’s downgrade of South Africa’s credit rating should have happened long ago. We’ve known for ...
Read More »

  

COFACE SA: Review of the credit insurance sector by Moody's

The rating agency Moody's confirmed Coface’s Insurance Financial Strength (IFS) A2 rating on 27 March 2020. The outlook for this ...
Read More »

  

How high volatility can offer investors good opportunities to buy

It’s always darkest before the dawn, and markets across the globe are looking pretty dark right now. I’m not saying that the worst is over, or nearly over (my crystal ball is simply not giving me any ...
Read More »

 

More News »

Image

Healthcare »

Image

Life »

Image

Retirement »

Image

Short-term »

Advertise Here
Advertise Here

From The Glossary »

Icon

Insolvency Clause:

The clause that holds the reinsurer liable for his pro-rata share of any loss (or losses) assumed under the treaty, even though the direct company has become insolvent.
More Definitions »

 

Advertise

 

eZine

 

Contact IG

 

Media Pack

 

RSS Feeds

By using this website you agree to the Terms of Use.
Copyright © Insurance Gateway (Pty) Ltd 2004 - 2020. All Rights Reserved.