Tax saving opportunities for 2025

Feel free to reach out to PSG Wealth Adviser Ross Marriner directly.

The end of February is the final opportunity for savvy investors to optimise their tax savings for the current tax year by making additional contributions to their retirement annuities (RAs) and tax-free investment plans (TFIP).

Retirement Annuities: A Tax-Efficient, Portable Pension Plan

Investing in a retirement annuity offers numerous benefits:

• Tax Deductions: Contributions reduce your taxable income, lowering the amount of tax you will need to pay.
• Tax-Free Growth: Investment returns within a retirement annuity are exempt from income tax, dividends tax, and capital gains tax.
• Estate Planning Benefits: RA proceeds are not subject to executor’s fees or estate duty upon your death.
• Creditor Protection: Funds invested in a retirement annuity are protected from creditors, offering financial security even during tough times.

At retirement, lump sums withdrawn from a retirement annuity are taxed according to government regulations, which may change periodically. However, the long-term benefits usually outweigh these tax implications.

Even if you are already contributing to a pension or provident fund, adding a retirement annuity to your investment portfolio can be advantageous. Many employment-linked pension funds provide annual increases below inflation, which can place a strain on household finances for retirees. Supplementing your pension income with proceeds from a retirement annuity can help bridge this gap and maintain your financial stability in retirement.

Tax-Free Investments: A Flexible Growth Opportunity

Tax-free investments allow individuals to invest up to R3 000 monthly (R36 000 annually) with a lifetime contribution cap of R500 000. The key benefit of a tax-free investment is that all growth is completely exempt from interest, dividends, and capital gains tax. However, contributions in excess of these limits will be taxed at 40%.

To understand the potential impact, a recent study by Old Mutual compared an investment of R2 500 per month for 200 months in a tax-free unit trust versus a similar taxable product. Based on the illustrative tax rate they used, the tax-free option resulted in a final value over R175 000 higher than the taxable counterpart —highlighting the significant drain taxes can have on investment growth.

Comparing Retirement Annuities and Tax-Free Investments

While both retirement annuities and tax-free investment plans offer substantial tax benefits, there are key differences:

• Tax Deductions: RA contributions are tax-deductible (within limits), while TFIP contributions are not.
• Access to Funds: Tax-free investments funds can be accessed anytime, but in the case of a retirement annuity, only a small portion of your money is available on an annual basis via the new two-pot system. Accessing your retirement funds should ideally be avoided if possible. Once you retire, the maximum you can withdraw from your capital in cash is limited, and the remainder must be used to purchase an annuity.

Both retirement annuities and tax-free investment plans provide diverse investment choices to suit individual needs. Consulting an experienced Certified Financial Planner® can help you identify the products that best align with your financial goals and circumstances.

To meet the deadline imposed by most financial institutions, you should aim to make any contributions well before the middle of February 2025. Failing to do so may result in you paying more tax than you need to.