Different Breeds for Different Needs

Selecting the right pet for you will depend on your individual circumstances. The same is true with investments. Deciding on an appropriate tax-efficient investment, such as a retirement annuity (RA) or a tax-free savings account (TFSA) depends on your personal circumstances. But you don’t have to choose one or the other. You can include both an RA and a TFSA in your financial plan. This article explores why this is the case. 

Different purposes 

Retirement annuities (like the PSG Wealth Retirement Annuity) are registered retirement funds and are therefore subject to the same legislation as an employer’s pension or provident fund. They are investment vehicles with the specific purpose of helping investors save funds for retirement that will provide them with a regular income after retirement. 

On the other hand, tax-free savings accounts (such as the PSG Wealth Tax Free Investment Plan) were introduced to encourage better savings habits in general. These investments are offered by institutions such as banks, long-term insurers and managers of collective investment schemes. 

Different features 

Although RAs and TFSAs both generate income and offer growth free of tax, they each have unique features which should be considered as part of a holistic financial plan. 

Contributions to a retirement annuity fund can be deducted for tax purposes up the legislative limits (currently 27.5% of the higher of your remuneration or taxable income capped at R350 000 per tax year). Under normal circumstances, you cannot access retirement savings before the age of 55, and even then, you can only take up to one third of the value of these savings as a cash lump sum (subject to tax). The remainder must be used to purchase an annuity which will provide you with an income. There are no limits to what you can contribute to your retirement annuity. 

Contributions to tax-free savings accounts are limited to R36 000 per tax year and R500 000 over the lifetime of the investor. Contributions in excess of these limits will be taxed at 40%. Investors can withdraw from their TFSA at any time, but their annual and lifetime limits won’t increase again by the value of these withdrawals. Because of the tax-free nature of these investments, no tax will be levied on withdrawals from a TFSA.  

In terms of your estate planning, bear in mind that your beneficiaries will be treated differently for each of these investment vehicles. Because RAs are retirement funds, the death benefits won’t form part of the deceased investor’s estate. Instead, it will be distributed in terms of section 37C of the Pension Funds Act. This means that the death benefits will be distributed to the dependants determined by the trustees of the retirement fund. Depending on how a TFSA is structured, the proceeds of from a TFSA will either be paid into the estate’s bank account and be distributed according to the will of the deceased or directly to the nominated beneficiaries. 

Compatibility 

Once we understand the purpose of RAs and TFSAs respectively, and how their features differ, it is evident that the one cannot replace the other. Each will address a different aspect of your financial plan and, ideally, should be employed together to reach your overall financial goals. 

Seek expert advice 

“Adopt, don’t shop” is a worthy mantra when it comes to adding a furry friend to your family. When it comes to you financial goals, however, take the time to shop around for a trusted  financial adviser to help you reach your financial goals by investing in an RA and/or a TFSA.