Question:
Each month I contribute 20 percent of my after-tax pay to a retirement annuity. I'd like to continue saving 20 percent towards retirement, but was wondering if I shouldn't maybe invest five percent in another way, possibly Satrix?

The reason I ask is that I know the tax benefit only goes up to 15 percent. Am I right in saying that beyond 15 percent there's no real benefit in the RA?

Answer:
Tax is an important consideration when choosing the optimal vehicle for one?s retirement capital. However, it is not the only consideration. With that said, let?s explore the situation at hand from the desired tax perspective.

In short, retirement annuities (RAs) are policies that are taken out by individuals seeking to find a disciplined vehicle in which to invest for retirement. Over the past few years, there have been considerable steps by SARS and other regulatory bodies to make this type of investment vehicle an attractive option in which to invest. This has been due largely due to the favourable tax concessions given to investors as well as the slashing of administration and commission costs.

Although the costs will vary from company to company, the tax discussion is far more definitive and worth exploring.

The key tax advantages of an RA lie in the area of deductibility of contributions as well as zero percent tax rate being applied on all interest accrued and capital growth made within the fund.

Section 11 of the Income Tax Act provides the rules pertaining to deductibility of contributions and allows for deductions with the maximum of the greater of:

• 15 percent of non-retirement funding taxable income; or

• R3500 less allowable pension fund contributions; or

• R1750

For those who do find themselves in a position of contributing over and above the maximums highlighted above, all is not lost. This is because upon retirement from the fund, all these contributions (called disallowed contributions) will be added to the maximum tax-free amount allowed from the one third lump sum consideration.

The other tax benefit of an RA is that all growth enjoyed within the fund attracts no tax. This is in comparison to other vehicles where tax liability may occur. In the case of an endowment, all net rental income and interest earned will be taxed at a flat rate of 30 percent and all capital gains at 7.5 percent.

For collective investment schemes (such as Satrix) all the interest and gains are taxable in the hands of the investor at their respective marginal rate of tax. Of course, for Collective Investment Schemes, there are some attractive exemptions offered by SARS that could sweeten the deal. Interest exemptions allow for an investor under the age of 65 being exempt of tax for interest earned up to a maximum of R21 000 with over 65?s getting a R30 000 exemption. There is also an annual capital gains tax exclusion of R17 500 but there needs to be a deemed disposal to benefit from this (such as a switch, redemption, etc.).

Go to page two for the rest of Shaun's answer...

acsis Limited is an authorised financial services provider. The response to the question covers some of the issues in a general and factual manner and does not constitute advice. It is important to consult with a financial planner who, after an analysis of the individuals? personal needs, goals and circumstances, will be able to provide comprehensive and appropriate advice.