Top up to get tax back!

Cedrick is one of a new generation of hip, young professionals with what might be described as old-fashioned ideas about money. They are hard-working and disciplined, take a long-term view on investing and have a dim view of short-term credit.

They are also wise to the value of bargains and cash-back deals, which is how you might describe the South African revenue Service’s tax incentives for retirement saving.  

“It is really very simple,” says Cedrick, “you save for retirement and the taxman rewards you by giving you cash back.”

By way of an example, he shares the personal balance sheet of a friend, who used to argue there was no point saving more than she already was for her retirement until Cedrick ‘crunched the numbers’ for her recently.

The friend, who we will call Thando, is 27 years old and six years into her career and, in Cedrick’s words, has “had a good run”. Thando has been saving for retirement from the start of her working career, as well as putting a little extra away on the side. After the loss of R20,000 in an “entrepreneurial experiment” that went sour, Thando has R50,000 left in her savings account. 

Cedrick says: “Thando toyed with a high-risk way of putting her savings to work, but after her ‘entrepreneurial experiment’ cost her R20,000, she figured that not everyone is meant to be a business owner.”

She continued to look for something that could reward her for the discipline of saving this money, he says.

Thando had read somewhere that saving money in a retirement annuity was a good idea so she asked her friend Cedrick to do some calculations and look at the pros and cons with her.

Cedrick told Thando that he couldn’t think of any cons, as long as she chose an index tracking fund and kept costs down. Index tracking funds are consistently shown to outperform actively managed funds, and paying low fees is key to retirement savings success. One or two percent extra in fees might not seem like a big deal, but those costs compounded over time can make a difference of more than 50% in the value of your savings pot at the end of a 40-year working life.

The ‘pros’ list, on the other hand, looked pretty healthy, Cedrick said. He told Thando that all the returns in a retirement annuity are free of tax. “No tax at all on interest, dividends and capital growth.”

He also told her that the money would be protected from creditors and could not be attached to her debts if her old business came back to haunt her.

The money is safe from temptation too as it is locked away until she reaches 55.

And then the dusting on the cake, says Cedrick, is that all contributions Thando makes to an RA are tax deductible. So putting that R50,000 into a retirement fund means her tax bill for the year will be reduced. 

Here are her numbers (as per the 2019 tax tables: http://www.sars.gov.za/Tax-Rates/Income-Tax/Pages/Rates%20of%20Tax%20for%20Individuals.aspx

• Thando currently earns R40,000 a month before tax ie R480,000 a year.
  
• She contributes 15% of her annual salary to her employer pension fund, that is R72,000 per annum. This reduces her taxable income to R408,000, making her liable for a tax bill of roughly R81,453 for the year before any allowances, exclusions and deductions.
  
• (R480,000 – R72,000) = R408,000
  
• [63,853 + 31% (R408,000 - R305,850)] = R95,520 - R14,067(primary rebate) = R81,453 
  
• If she adds the R50,000 from her savings account to a retirement annuity she will further reduce her tax liability. She will now have a taxable income of just R358,000, making her liable for a tax bill of roughly R65,953 for the year before any allowances, exclusions and deductions.
  
• R408,000 – R50,000 = R358,000
  
• [63,853 + 31% (R358,000 - R305,850)] = R80,020 - R14,067(primary rebate) = R65,953 

“That is a whopping R15 500 further reduction in her tax bill,” says Cedrick. “It was a no-brainer for Thando, who now has an additional R50k growing in an RA and is looking forward to a nice tax refund.”