Save tax with a Retirement Annuity!

A Retirement Annuity (RA) Fund is a personal retirement plan which enables you to save tax-effectively for your future needs. It is an ideal way to supplement your existing retirement savings if you earn non-pensionable taxable income (also called "non-retirement funding" income). Non-pensionable taxable income includes:


 All earnings of tax payers who are not members of pension or provident funds;

 Earnings of members of pension or provident funds where such earnings are defined as non-pensionable income; and

 For both such members and non-members, it also includes bonuses, share option gains, director's fees, certain allowances and also taxable income from portfolio or property investments.

Tax Incentives

 Up to 15% of non-pensionable taxable earnings can be invested in RA's and deducted from taxable income. Please see the example below to understand how this benefit helps to reduce tax and enhance wealth.

 Coupled with the tax deduction on the contributions, there is no tax payable on either the capital gains resulting from investment growth or on the income earned (such as interest, net rental income and foreign dividends) within the RA. The tax benefit within the fund comes into effect immediately, enhancing your capital at retirement. On retirement, the lump sum tax-free component has been increased with reduced average tax rates applied to the taxable portion.

 Whilst the eventual proceeds on retirement from the fund are subject to tax, this is deferred in the first instance and the allowances are relatively generous. This means that the tax rates on your receipts (be they as capital in the form of a lump-sum "cash" payment or as income in the form of annuity payments) should always be less than the current rate applicable to such contributions.

 The legislative changes to the Income Tax Act also make RA's an attractive estate duty-free investment.

Example showing indicative tax and net wealth benefits using non-pensionable taxable income of R1 000 000 per annum:

1. Without RA Rand

Non-pensionable income 1 000 000

Less: normal tax at 40% -400 000

Net after-tax income 600 000

Net wealth (after-tax income 600 000 + no investment) 600 000



2. With RA Rand

Non-pensionable income 1 000 000

Less: Contribution to RA at maximum 15% -150 000

Taxable income 850 000

Less: normal tax at 40% -340 000

Net after-tax income 510 000

Net wealth (after-tax income 510 000 + 150 000 investment) 660 000

 As shown above, the R150 000 contribution to the RA is subsidized (in the form of reduced tax) and reduces the tax payable by R60 000 from R400 000 to R340 000. In effect, this means that it only costs R90 000 (after tax) to create an investment of R150 000.



 It is important to note that 28 February 2011 is this tax-year's deadline for you to take advantage of the tax benefit on your Retirement Annuity contributions. If you are interested in contributing to an RA, be it to top-up an existing investment or to start investing into a new RA, time is of the essence in order to complete the process ahead of the tax year-end.