The tax benefit of investing your bonus in an RA means that the receiver of revenue helps pay for your retirement.
You are allowed to deduct a maximum of 15% of your non-retirement funding income to invest in a retirement annuity. As your bonus does not form part of your retirement funding income, you can use 15% of this to boost your retirement savings.
Neill Katzeff of Mazars Moores Rowland Financial Services has calculated that the tax benefit of an RA makes it the best retirement savings product on the market. Katzeff assumed a monthly contribution of R1 000, with no escalation, for a period of 15 years. His hypothetical investor was 40 years old, and had a personal tax rate of 35%.
He also assumed the money would be invested in a balanced portfolio comprising equities, cash, bonds and property. The RA won’t be taxed on the cash, bonds and property, but the unit trust will be, so the RA will achieve returns of 13,8% and the unit trust will achieve 12,1%.
The money invested in the unit trust is paid with after-tax income whereas the RA is tax-deductible. This means that R1 540 can be paid into the RA as the net cost after the 35% deduction will be R1 000.
On maturity the RA will pay out one-third (R300 000) in cash, tax-free, with the balance (R614 863) buying a monthly taxable income. This is compared to the unit trust’s R505 308, which attracts CGT, whereas the RA monthly income attracts income tax.
Although the RA will attract income tax on retirement Katzeff says the lump sum of R300 000 will also render a return outside of the taxable retirement income.
Unit Trust RA
R1 000 pm x R1 540 pm x
15 years @12,1% 15 years @13,8%
R505 308 R914 863