South Africans have been encouraged to save for retirement as government has provided some incentives to assist the public in saving through its tax policy.
According to the National Treasury, South African households don’t save due to the cost structure in the market being too high for smaller investors; a risk of investing; poor investment advice; products that are not customized to their needs; a declining income and easy access to credit.
“It is very important to build a financial plan so that you can structure your affairs to take advantage of the various incentives that government provides in terms of tax,” Financial Planning Institute of Southern Africa Head of Policy and Engagement David Kop said on Thursday.
Addressing a Saving Month webinar, Kop said retirement is no longer a fixed destination but it is about defining the lifestyle that an individual seeks to have during retirement.
While the public has various financial products to look at for retirement savings, Kop highlighted some of the tax benefits to consider when putting together a retirement plan.
The financial products on the market include a retirement annuity, pension/provident fund as well as unit trusts, tax-free saving accounts and retail saving bonds.
“Through the retirement funds, which include the retirement annuity and pension provident fund, a person can claim a deduction of 27.5% of the greater taxable income or remuneration limited to R350 000 per year. Any growth in a retirement fund is tax-free. An individual will not pay any tax while the money is growing in the retirement fund,” he said.
With regards to a the tax free saving account, an individual does not get a deduction like the retirement fund but can contribute up to R36 000 per year with a lifetime limit of R500 000.
“The benefit of a tax free savings account is that when a person gets to a retirement age or when you start withdrawing out of the fund, the benefits that are drawn will not be taxed. It is a great way to accumulate money. The growth is also not taxed.
“On the voluntary investments, there is no deduction given for contributions but there is an incentive to saving through the voluntary investments like the retail saving bonds and unit trusts, in that the first R23 8000 of interest earned under those funds will not be subject to tax.”
He emphasised that the public does not get away with paying tax on the retirement saving.
“From a tax view point, it’s not that you can get away with not paying tax. You will eventually pay tax on the income so when you choose to exit the fund, tax will be paid on the retirement fund lump sum benefits.
“In South Africa, we have a progressive tax rate, which means the less that you earn, the less tax you pay and this is due to the income tax threshold,” Kop said.
RSA Retail Bonds
In 2004, National Treasury introduced the South African Retail Bonds to create awareness of the importance of saving, diversify the financial instrument on offer to market and target a new source of funding for government.
“RSA Retail Bonds were introduced to try and encourage South Africans to save so the features of the RSA Retail Bonds are based on making sure that we create a product that will be attractive for people who are scared on risk,” National Treasury Senior Analyst RSA Retail Bonds Thobeka Mandita said.
With the RSA Retail Bonds, individuals do not pay any fees and there is no commission.
“RSA Retail Bonds is a National Treasury product that allows the public to participate in buying government bonds without a middle man,” Mandita said.
The product is only available to South Africans and permanent residents. They must have a valid SA ID number and valid RSA bank account.
“Children and adults may purchase the RSA Retail Bonds. This is a greater feature for parents who want to start teaching their children how to save and introducing them into investments to teach them how they can make their money work for them. You can open up the RSA Retail Bonds in the name of a child.
“The product has 100% guarantee on returns. This is because it is backed by the full faith of government. When you are investing in the RSA Retail Bonds you are borrowing government money and government will pay you a percentage of the money you are borrowing,” she said.
The product has a feature of an early withdrawal but it comes with a penalty on the interest that has been earned should an individual require a withdrawal prior to the term ending.
More information is available on:
• Helpline: 012 315 5888
• Website: www.rsaretailbonds.gov.za
• Address: National Treasury (240 Vermeulen Street, c\o Andries and Vermeulen Streets, 14th floor, Pretoria)
Source: South African Government News Agency