As we head towards the end of the tax-year, you will be seeing tons of marketing from various product houses prompting contributions into your retirement annuity and/or tax-free investment plans. It is, however, necessary that you understand what this will actually mean for you, your tax, and your retirement planning. Although often mistaken for a marketing gimmick, the retirement annuity deductibility requires expertise from your intermediary, as well as a broader understanding of how your taxation planning influences the wholistic financial plan (which I would hope you have). Do you see where I am going with this? Wholistic financial planning. Because the Retirement Annuity deductibility can get a little more technical, lets us first clear the chat on the tax-free contributions:
National Treasury has been kind enough to allow every natural person (even the babies) to contribute up to R46000 (forty-six thousand rands) per tax year into a tax-free investment plan, returns of which will also be tax-free. This also serves as a tiny tax haven for people who already pay too much tax, and those who simply cannot afford to pay any more. It is okay to advocate for both sides. You probably already knew the above so perhaps the bigger conversation is when this tax benefit must be utilized. In my opinion, the tax-free investment plan should not be an emergency fund which you constantly access because you are essentially defeating its primary purpose. On a sunnier day, I will explain how the tax-free investment plan essentially allows you to save at least R500 000(five-hundred thousand) in readily accessible cash which you can use at retirement. Like I said, a sunnier day.
Back to the point, the Retirement Annuity and why your intermediary should have more than an intermediate understanding of what they are guiding you on. Section 11F of the Income Tax Act essentially dictates a safe zone of how much you can contribute into all your retirement funds whilst simultaneously attain tax relief within that tax year, before you start carrying benefits over into the succeeding tax years. Accordingly, you may contribute up to 27.5% of your taxable income or remuneration (limited to R460 000) to maximize this deduction during said tax year. Over and above enjoying the flexibility of when and how you can contribute to this investment tool (regular intervals or as and when you have the funds), knowing that it is protected from creditors really serves as the cherry on top of that retirement cake you get at the farewell party.
In reality, the two are best when they are both strategically integrated into your wholistic financial plan. The key is having a financial planner/intermediary whose skills have been honed to perfection. My only recommendation is that you reach out to one that will help optimize every aspect of your financial plan.