What do you do with your SARS refunds?

Feel free to reach out to PSG Wealth Manager  Mareli Binedell  directly.

Many of us receive a refund from SARS as a result of our retirement contributions in the relevant tax year.

Something many of us succumb to, is to spend the welcome ‘bonus’ received from SARS on expenses like holidays or simply covering daily expenses. This is all good and well, but you can boost your retirement savings significantly by reinvesting the refunds you receive.

Keep in mind that retirement annuities are subject to Regulation 28 of the Pension Funds Act, which means there are limits on offshore and equity exposure within the product. However, reinvesting your SARS refunds in your retirement annuity is not the only option. The money can be invested in voluntary funds like a tax-free or voluntary investment. These are liquid investments with no limits on offshore or equity exposure. So, you can invest 100% of your money in offshore equity funds.

Let us use an example to illustrate the impact of the tax saving on your investments. Investor A invests R3 000 a month in a retirement annuity escalating by 5% per annum, also assuming a 9% portfolio growth rate and that the investor’s marginal tax rate is 36%. Investor A decides to spend the annual SARS refund instead of reinvesting it. After 30 years, the portfolio value will be about R8 438 489.

Likewise, Investor B invests R3 000 a month in a retirement annuity escalating by 5% per annum, also assuming a 9% portfolio growth rate and that the investor’s marginal tax rate is 36%. Investor B decides to reinvest the annual SARS refund in voluntary funds. After 30 years, the portfolio value will be about R11 598 215. So, in addition, Investor B may end up with a lot more offshore exposure in his portfolio.

To illustrate this, see the numbers and asset allocation pie chart below:  

So maybe we should all think twice before we decide what to do with the next refund we receive from SARS.