As the tax year end approaches, South African financial consumers, and the public need to take advantage of the allowable tax deductions offered by the South African Revenue Service (SARS). These deductions can help reduce your tax liability, impact your estate positively, protect against creditors, and provide a system of forced savings for retirement.
I have listed the following benefits below for you to discuss with your financial professional.
- Reduce your tax liability
- Positive impact on your estate as it does not form part of your estate
- Protection against creditors under the Pension Fund Act
R 350 000 per year limit and the maximum of 27.5%:
- This limit applies to the total amount of tax deductions that can be claimed each year
- The 27.5% maximum applies to the portion of your taxable income that can be claimed as deductions
Forced savings for retirement:
- The deductions serve as a system of forced savings, as the money is set aside for retirement before it can be spent on other expenses
Options after age 55:
- Upon reaching age 55, you have the opportunity to withdraw one-third of your retirement savings as a lump sum
- The remaining two-thirds must be invested in an approved income-generating annuity-type product
It is also important to note that before the start of the new tax year on 1 March, it is an opportunity for you to work with your financial advisor and tax practitioner to review your income for the following tax year. They can help you to increase your current Retirement Annuity (RA) or take out a new RA to maximize your contributions. This way, you will not end at tax year end looking for cash flow to make an ad-hoc payment. It is a great way to take advantage of the allowable tax deductions and make the most of the forced savings’ system for your retirement.
An essential aspect is that Retirement Annuities typically can be rolled over open-ended after age 55 if you do not take the early retirement option. It means that you can continue contributing to your RA even after you reach the age of 55, allowing you to save even more for your retirement.
I recommend considering a new-generation low-cost retirement annuity (LISP) that typically has lower fees than traditional annuities, which can mean more money being saved for your retirement due to enhance yields. They also offer a more comprehensive range of investment options, allowing you to tailor your retirement savings to your individual needs and risk appetite. They often allow for more flexibility regarding contributions and withdrawals.
After age 55, you can withdraw one-third of your retirement savings as a lump sum, with the remaining two-thirds required to be invested in an approved income annuity fund. By taking advantage of the allowable tax deductions offered by SARS before the tax year end and considering a new generation of low-cost retirement annuities, you can maximize your retirement savings and achieve your financial goals.
Finally, taking advantage of the allowable tax deductions offered by SARS before the tax year end on February 28th can significantly reduce your tax liability, impact your estate and protection against creditors, and provide a system of forced savings for retirement. The R 350 000 per year limit and the maximum of 27.5% should be considered when planning your deductions.
It is recommended that you work with a financial professional and tax practitioner to ensure that your chosen product suits your needs and goals. If you do not currently have a financial advisor or tax practitioner, you can find a qualified professional by contacting the Financial Planning Institute (FPI) of South Africa. They can help you make the most of the allowable tax deductions offered by SARS and assist you in choosing the right retirement annuity product for your needs.
So Don’t Be Taxed to Death – Save for Retirement and Reduce Your Liability with SARS Allowable Deductions.
Created by Kobus Kleyn CFP®, TEP, TP