When Benjamin Franklin said that nothing in life is certain besides death and taxes, he had a point. But taxes, although often seen as a hassle by many consumers, can be dealt with cleverly by reviewing one’s various savings and investment vehicles, and making certain your financial planning is tax efficient.
According to Marius Pretorius, Old Mutual head of marketing: retail savings and income solutions, there are various tax-efficient savings vehicles available to suit a range of needs. “These consist of retirement annuities, unit trusts and tax-free savings accounts, among others. Not only do these vehicles have different rules, levels of liquidity and flexibility, they are also regarded differently by SARS (South African Revenue Services) from a taxation point of view.”
Pretorius says that not considering the impact of tax could negatively impact your ability to reach your goals: “An extreme example is deciding to take your retirement savings in cash when you change jobs. This has massive tax implications that will impact your ability to retire comfortably. Sadly, too many people opt to cash in their retirement savings when they change jobs.
“This is why it’s important to have a financial adviser who can provide advice on the best way forward, according to your specific financial needs and goals at any particular stage,” says Pretorius.
If you don’t get your money right, you can’t get your future right. An important step is to ensure your long-term savings plan is on track. He points out that Retirement Annuities (RAs) are particularly tax efficient to encourage longer-term saving. Contributions are tax deductible up to a set limit and the growth in your RA is not subject to tax on interest, capital gains tax or dividends tax. In addition, there are also tax concessions at retirement.
To optimise your savings for tax efficiency, Pretorius believes that South Africans should also consider a Tax Free Savings Account (TFSA), the next most tax-efficient savings vehicle. “Most people start off by saving money in a savings bank account. Although bank accounts are a good option from a short term perspective, the interest earned is low compared with market-linked invested alternatives,” he says. “Investments traditionally attract a range of taxes, such as income tax and capital gains tax for the investor, or taxation within the investment fund, and can impact the ultimate return earned.”
With TFSAs you have the opportunity to invest up to R33 000 a year in a tax free investment account. “This is an extremely valuable offering because, until now, the rule of thumb has been that if you earn money on it, tax could be paid on it,” says Pretorius.
He concludes that it is important to have a holistic financial plan to ensure efficiency and effectiveness across your savings needs. “Making sure that your hard-earned savings are growing and working for you is imperative. A financial adviser can help you get the most out of your savings.”
These are useful tips to consider concerning your savings plan:
- Assess how hard your money is working for you
- Understand how different savings and investment vehicles are taxed
- Examine the efficiency of your long-term retirement savings
- Consider tax free savings accounts