How to maximise your benefits this tax season

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With the added pressure of increasing fuel prices, inflation and the cost of living, every rand you put away for your future self, counts. (Image: Supplied)
With the added pressure of increasing fuel prices, inflation and the cost of living, every rand you put away for your future self, counts. (Image: Supplied)

As we begin to emerge from the COVID-19 pandemic, it is important to revisit critical long-term investment goals, take stock, and figure out how to get back on track.

By understanding your options, and how you can take advantage of the tax benefits of some of the more popular savings vehicles, you may feel more in control of your situation, and able to make the decisions necessary to look after your future self.

Tax efficiency is a key aspect of a healthy financial plan, yet many investors fail to take tax into account when looking at how they can maximise their future investment returns.

By considering the tax implications of your financial decisions and incorporating retirement funds and tax-free investments into your long-term investment strategies, you can improve your chances of retiring comfortably and increase the amount of financial flexibility you have before and at the point of retirement.

Investors must make their money work harder, and using the tax breaks is one way to do so. Remember, if you don’t make use of them each year, you forfeit them, so it’s a good idea to familiarise yourself with what’s on offer.

While there are tax benefits associated with both retirement annuities (RAs) and tax-free investments (TFIs), the benefits are structured differently, and the product rules are quite distinct.

Depending on your goals and objectives, there may be a place for both products in your investment portfolio.

An RA remains an ideal investment vehicle to save towards a comfortable retirement. The government allows you to get a tax deduction on the money you invest up to an annual amount of 27.5% of the greater of taxable income or remuneration (capped at R350 000 annually). However, if you invest more than this, you can still get the tax benefit in the future. You also pay no tax on the interest, capital gains or dividends you earn while invested.

You must be able to live with the restrictions: You can only access your money when you retire (after age 55). In addition, you can only take one-third of the amount as a cash lump sum. The rest must be used to purchase an income-bearing product in retirement, such as a living or guaranteed life annuity

A TFI, on the other hand, is a great way to boost your savings and invest over the long term. Although you invest with after-tax money, you pay no tax on the interest, capital gains or dividends you earn, or on withdrawals. TFIs are not as restrictive as retirement products – you can access your money if you need to. The true benefit of a TFI is felt over the long term as tax-free returns compound.

SARS allows taxpayers to save a maximum of R36 000 per year and R500 000 in your lifetime tax-free if you invest in a TFI. There are, however, tax implications for over contributing to a TFI and you cannot replace money you withdraw.

The incentives on both TFIs and RAs can be very attractive, particularly because the longer you leave your money invested, the harder compound interest can work for you.

It is important to look at your portfolio holistically, either on your own or with the help of a good, independent financial adviser, to ensure your decisions fit in with your long-term plan.

This post and content is sponsored, written and provided by Allan Gray.

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