If 2013 has kicked off with such a bang that you forgot all about Valentine’s Day last week, fear not. Here’s your chance to make it up to that extra special person in your life by ensuring you don’t miss the deadline of making full use of your deductible retirement annuity contribution for the 2013 tax year.
Why you say? Because who wants to waste a free gift from SARS?
Allow me to explain...
As taxpayers we are allowed to claim a maximum of 15 percent of our non-retirement funding income as a deduction for tax purposes.
Non retirement what you say?
In a nutshell, what this means is that those of us who are aren’t contributing to a company provident or pension fund need to create our own personal pension fund, which is where the retirement annuity, or RA, comes in. If you work for yourself, or run your own business, any consulting income, professional fees or rental income should qualify as non-retirement funding income. So too does your annual bonus which is good news to those company employees.
RAs are a very useful tool within the broad scope of your financial planning. I would stress, however, that one should tread with caution.
Unfortunately the stats show that many people buy RAs which tie them in for a specific term (to age 55, 60 or even 65!). To give you the inside scoop: the longer the term, the higher the agent’s commission and the nicer the car he drives. If you go this route, never allow the term to go beyond age 55!
Why 55 you ask?
This is the current legal age at which you could access funds within your RA (or personal pension fund). The reason is simple. Our government wants to encourage you all to save for your retirement so that you don’t become a burden to them when you’re looking less like a young Bilbo Baggins and more like Gandalf the Grey. So they incentivise this by giving you a tax deduction if you contribute to your RA, but restrict you from accessing your RA until you are 55. To add to this, the growth in your RA is not taxed, so the government incentivises you in more ways than one.
The great news, for all those Gandalfs out there, is that at one stage you had to retire from your RAs at the young old age of 70. This is no longer the case and any Gandalfs still enjoying the adventure of working can continue making use of their annual deduction until the day they depart from this world into the next.
I would highly recommend you invest into a relationship with a trusted independent Certified Financial Planner (look for CFP© on their business card). CFPs subscribe to the highest code of ethics within their profession and you can be sure that you will be getting good advice.
I would advise you make use of an open ended or unit trust RA (not term based) and negotiate an initial fee which should buy you a comprehensive financial plan explaining what investments you implement and why. An ongoing fee per year (usually one percent +VAT.) will also apply on any investments implemented which would then facilitate the ongoing relationship accordingly.
The open ended, or unit trust, RA will usually be offered by a linked investment services provider or LISP for short. These companies allow you to select different unit trust funds to target your required investment return. What funds you choose is vital to the long term investment performance of your RA and should be done with care and guidance.
Regardless of what type of RA you have, term or unit trust, don’t miss out on this opportunity to contribute the full 15 percent of your non-retirement funding income before 28 February 2013.
If you have a 40 percent marginal tax rate, this means that SARS effectively give you 40 percent of the 15 percent back as a tax refund — which can be used to go on that extra special holiday later in the year to make up for your distinct lack of Casanova style last Thursday.
Don’t thank me, thank SARS.
Donovan Adams CFP© is a Certified Financial Planner and Retirement Specialist at Chartered Wealth Solutions in JHB.