Topping-up could make all the difference

When I think of toppings I think of my favorite sweet topping on a perfectly brown baked waffle.  The picture is complete as I am feasting on this piece of heaven whilst sitting with my feet in the sand on the south-coast.  My favorite topping is undoubtably milk chocolate flake, caramel with ice cream.  The topping is essential in making the waffle something irresistible.  I think it is fair to say that the topping adds a lot of value to the waffle, even though the waffle is crispy and delicious.  Yummy, just thinking about it is mouthwatering. 

Similarly, topping up your investments can make all the difference.  It will cost a bit more from a planning and cash flow perspective but if you budget well, you will enjoy the benefits.  What are the benefits of topping-up your retirement annuity or tax-free savings account?

  • Investing lump sum amounts means you increase your total amount of savings which will result in more income at retirement.
  • Tax benefits with regards to retirement annuities and tax-free savings accounts (see the detail below);
  • Monies invested in a retirement annuity will be protected against claims from creditors should you become insolvent.
  • The retirement annuity investment is not subject to estate duty, so effectively you are reducing your estate value and could potentially save costs in the event of death.
  • More time in the market provides you with the best opportunity to grow your investments over the long term.

January and February tend to be difficult months from a cash flow perspective since we are inclined to spend more during the summer holidays.  How do you budget for these lump sum top-ups?  First, these contributions do not have to be made in January and February.  You can save up additional cash through the year and do the top-ups in November or December following the calendar rather than the tax year.  Second, start the habit of allocating a portion of your bonus or 13th cheque towards topping-up.  Most South Africans spend all their bonusses on settling debt, vacations, or home improvements.  Start the habit of saving for your long-term goals as you receive your bonus, this is a game changer.  Finally, use a spend tracking application to gain a better understanding of what you are spending and where you could potentially save more monthly.  This will enable you to top-up savings at the end of the year, while not forgetting to keep your emergency fund in place.

Retirement Annuity Top-up

Legislation encourages savings and contributions towards retirement.  There are significant tax benefits in contributing towards Pension-, Provident- or Retirement Annuity Funds.  As of the 1st of March 2016, an individual can deduct contributions to Pension-, Provident- or Retirement Annuities to the value of 27.5% of the greater of taxable income or remuneration limited to an amount of R350 000 per annum.  We would like to bring to your attention that this essentially means that more can be deducted from tax than in prior years.  If your estimated tax is more than expected, you should strongly consider an additional contribution towards your Retirement vehicle to reduce your tax liability.  This is a much better way of reducing tax as opposed to settling the tax or the deduction of more PAYE in the month of February (which we often see occurring in practice). 

Tax Free Savings Account Top-up

An individual is allowed to contribute a maximum of R36 000 per annum to a Tax-Free Savings Account with a lifetime limit of R500 000.  This is a long-term investment vehicle and should not be used as a call account.  Please also note there are hefty fines and penalties if the annual limit is exceeded.

Topping-up your retirement annuity or tax-free savings account can really make all the difference from a financial planning perspective.  This could enable you to reach your long-term financial goals and objectives sooner than planned.  Rather work towards obtaining delayed gratification than instant gratification.  If you successfully implement this habit, you will undoubtably be enjoying more of those perfectly baked waffles with your favorite topping one day on the beach in retirement. 

By Hendri de Klerk, CPR® professional – Ultima

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