INCOME TAX TOOL:
- A tax deduction (discussed below) for contributions to an RA, within certain limits. (Note the change in
2015) - Unused deductions can be carried forward to future years or used to increase the tax-free amount at
(and due to recent amendments, after) retirement.
o Section 11k will allow a tax deduction for any amount contributed to any pension fund, provident fund
or retirement annuity fund to a limit of the lesser of-
▪ R350 000 or
▪ 27.5% of the person’s remuneration or taxable income.
o A maximum tax deduction of R350 000 in one tax year will be permitted and any unused deductions can
be rolled over to another year.
o Most important benefit/ opportunity is to “top up” clients who are below the 27.5 % maximum.
o Employer contributions taxed as a fringe benefit in employee’s hands and deemed to be employee contributions.
- No tax (including no Capital Gains Tax and Dividend Withholding Tax) is levied on the build-up of
capital within the RA (only taxed at retirement). Consider the compounding effect on tax-free returns
until retirement.) - At retirement your marginal rate (paid on an annuity drawn) is likely to be lower than your marginal
rate when you earned the income. (Additional rebates applicable on annuity income from retirement
funding, thus the 2/3.) - The first R945 000 lump sum (restricted to one third) taken at retirement is effectively only taxed at 15%
and no CGT is payable. (The tax tables are cumulative so each band can only be used once.)
INVESTMENT TOOL: - Retirement annuities provide the member with access to a portfolio of shares or unit trusts managed
by a stockbroker or fund manager as if it is a direct investment into a portfolio of shares or other
instruments. - Seen in this light, the RA contribution can be compared to a direct investment into a portfolio of shares
on the JSE, at a 40% discount. - Profits made on share trades are also exempt from CGT.
ESTATE PLANNING TOOL:
- No estate duty (20%) on retirement lump sums or annuity payments on the death of the member.
- Large estate (above the current R3.5 million abatement) can capitalize on savings on estate duty.
- Heirs will pay tax on any income elected/received but the capital build-up will continue to be tax-free.
- No executor’s fees (3.5% excl VAT) on the value of the RA on death if you nominated a beneficiary.
RA VS TRUST: - Investing in a single contribution retirement annuity and then electing a living annuity can be likened to
being a beneficiary of a Trust. - All contributions to RA is removed from your estate immediately; both the lump sum (accruing after 1
January 2009) and the annuity are not subject to estate duty. - Contributions to an RA, as opposed to donating the amount to a trust, will allow the money to be taken
out of the estate without attracting donations tax, but with the added benefit of an income tax
deduction. - Individuals are allowed to donate up to R100 000 per tax year (R200 000 for couples) without incurring
any liability for donations tax; where RA provides for more flexibility and up to R350,000 per tax year
(from 2015) to be ‘donated’/ contributed and removed from estate. - Donating assets to a trust will trigger anti-avoidance provisions in the Income Tax Act.
- Income that arises in the trust may be taxed in the hands of the person who donated assets to
the trust. - Investments within a trust don’t qualify for interest exemptions. Investment growth in an RA is tax-
free – it attracts no income tax or capital gains tax (CGT). (Had the build-up taken place in the investor’s
estate, the payout could potentially be reduced by up to 20%, being the current estate duty rate.)
- A trust that is not managed correctly runs the risk of being attached as a “sham” trust and therefore the
assets inside the trust are exposed. - Investors are protected in the case of insolvency;
BUYING A LIVING ANNUITY: - Protected against creditors in the case of insolvency or divorce. (With divorce, it’s important to note
that this does not apply during the build-up phase.) - Beneficiaries can be nominated to receive an income on the death of the investor. (Annuity income
taxed in the hands of the recipient beneficiary at marginal his tax rate.) - On death, the annuity income can be spread across a number of nominated beneficiaries which may
reduce the overall tax burden. - No executors fee (3,5% excluding VAT) provided that a beneficiary is nominated.
- The investor can select the underlying assets in which the annuity is to be invested.
- No Capital Gains Tax, Income Tax or Retirement Fund Tax is payable on the assets in the Living
Annuities. - No Estate Duty on the amount applied to buy the annuity.
- Unused deductions on original RA can be carried forward to future years or used to increase the tax-
free amount at (and due to recent amendments) after retirement. (Income drawn by beneficiaries also
qualifies for this deduction.)
OTHER BENEFITS AND PROTECTION:
- In the event of emigration before age 55 (or an extended contractual maturity date) the full value of the
RA may be withdrawn as a lump sum (subject to tax). - Protected against creditors and insolvency in terms of the Pension Funds Act.
- The annuity you receive after retirement from your RA is only taxed when you receive it (if you defer
this you pay no tax until you actually receive it). - Choice of investment portfolios.