With the tax year of assessment drawing closer, it is now the time to ensure that you are making the most of your tax benefits associated with your retirement annuity (RA).
The deadline for RA contributions for the 2021 tax year is 28 February 2021, so it is important to note the following information regarding your RA:
- RA contributions are deducted from your taxable income. There is also no tax on interests or capital gains on this investment. This example illustrates it clearly:
If your annual income is R 500 000.00 and you contributed a total of R 50 000.00 to your RA during the year, you are only taxed on R 450 000.00 (excluding other tax deductions).
- There are limits to the amount that is deductible from tax. In a single tax year, a maximum of 27.5% of your taxable income or R 350 000.00 (whichever is higher) is tax deductible. This limit applies to all your retirement savings combined, including pension and provident funds – for example:
If you contributed a total of R 350 000.00 and R 150 000.00 was contributed to your pension fund, only R 200 000.00 contributed to your RA would be deductible.
- You are able to contribute more than the maximum to your RA. However, additional contributions will be brought forward and will be deducted automatically in future.
RETIREMENT FUND REFORM EFFECTIVE 1 MARCH 2021
Government recently announced new annuitisation rules applicable to provident fund members younger than 55 years on 1 March 2021. These members will be affected as follows:
- Going forward, provident fund members have the option to access all fund contributions including investment growth up to 28 February 2021, as a cash lump sum at retirement. With this amount, members can choose to purchase an income for retirement. This refers to vested benefits which include contributions prior to 1 March 2021 and investment growth on contributions after this date.
- Alternatively, members have the option to access up to one-third of their fund as a cash lump sum, similar to members that retire using their pension funds. The remaining two-thirds of the fund must be used to purchase a monthly retirement income. This option refers to non-vested benefits which include contributions and investment growth from 1 March 2021 onwards.
- In terms of non-vested benefits and when total retirement interests are less than R 247 500.00, the full amount may be accessed as a lump sum at retirement.
- Provident fund members aged 55 or older on 1 March 2021, are unaffected by the new rules. These members are entitled to access their full benefits at retirement as a cash lump sum.
- From the effective date, members will be able to transfer retirement savings from pension funds to provident funds tax-free, and vice versa. However, savings from RA funds can only be transferred tax-free if transferred to another RA fund.
Bearing these changes in mind, it is important to regularly review your RA to assess whether funds are performing acceptably, to determine whether the current asset allocation is still appropriate, to consider the impact of changing economic conditions on your investment and to ensure that your retirement plan is still aligned to your desired standard of living for retirement.