Shrikanth asks: I immigrated to South Africa five years ago. I want to contribute to an retirement annuity (RA) but I might go back to my home country after 5 or 10 years. What would happen to my RA? Can I take all my money and what would the tax implications be? Is the RA a better option due to the tax benefit or should I go for a unit trust?
Maya replies: If you are not contributing to any other pension/provident fund you can invest 15% of your salary tax-free. If you officially emigrate you would be able to cash in your retirement annuity.
Taxable amount
Based on current tax tables, when you withdraw the lump sum the first R22 500 is fully exempt. After these exempt portions the amount up to R600 000 is taxed at 18%, the next R300 000 at 27% and any amount above that figure at 36%
Tax saving
You need to do your maths carefully to see if there is a tax benefit. For example if you earn R40 000 a month you would contribute R6 000 per month to the RA.
Because this would be with before tax money you would “save” R2 400 a month in tax. Over ten years that is a R288 000 tax saving (for simplicity I assume no salary increase).
Assuming the R6 000 per month grows at an average rate of 12% a year, at the end of the 10-year period it would be worth R1,350-million.
On withdrawal you would pay about R333 000 in tax — nearly R100 000 more than the tax benefit you received.
Power of compounding
If you saved R3 600 with after-tax money (R6 000 less the R2 400 tax saving) in a unit trust with the same returns, you would have saved R828 000 which is R522 000 less than the RA example.
This is the power of the tax benefit as it allows you to save more so you benefit from the compounding returns on the higher contributions.
However there are some provisos: Firstly, I have assumed a maximum tax rate of 40%. The relative tax benefits on the contributions decrease for lower tax rates while the withdrawal tax remains the same.
Secondly, an RA restricts you to 75% in equities. At your age, with a 10-year view most financial advisors would recommend a higher equity weighting, which should provide higher returns than the RA. Even if your investment grows by 2% more a year in a full equity unit trust the returns jump to R932 000.
It is best to sit down with your accountant and do a proper analysis. Considering the amount you have available to invest, you would probably want to invest in both an RA and a unit trust.
Independent financial advisors prefer investment houses like Investec, Allan Gray, Coronation and Prudential. You can also check out Investonline.co.za.
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