Topping Up Your Retirement Annuity Fund
The Weekender / Business Day, February 2007

Retirement Annuity Fund Contributions

It is almost the end of the 2006-07 tax year. For most of us, complying with the deadline is a mad rush. After amendments to the Income Tax Act, most taxpayers have limited tax-planning opportunities. However, a very useful deduction available to taxpayers wishing to boost their retirement capital is the deduction for contributions to your provident fund or retirement annuity fund (RA).

If you miss the opportunity to contribute for a particular tax year, it is gone forever. Should you not be able to deduct all your retirement annuity fund contributions in a tax year, this may be carried forward to the following tax year.

Forget about risky and expensive tax-dodging schemes. An RA can be a very tax-effective vehicle for investing. For example, if you have R1 000 to save a month, you could choose to invest in an RA structure or a unit trust structure.

If you choose the RA, you would save R1 600 a month (assuming you pay tax at a rate of 40%). This is because the taxman wants to incentivise individuals to save for their own retirement.

A simple calculation shows if you had R1 000 a month to invest and invested the tax saving (R667), after 20 years' contributions your RA fund would be worth R773 918. If you selected a unit trust fund, your investment would be worth R464 351 (assuming the same underlying investment portfolio and a real return of 6% a year). Therefore you have an additional R309 567 in retirement capital.

You are able to select almost any retirement annuity fund available in SA for the underlying investment in an RA. New-generation RAs are flexible and transparent. You are able to structure your income, draw down and thus manage your taxable income at retirement. You can increase or decrease and start or stop paying premiums at any stage without incurring penalties.

It is advisable to keep records of your retirement annuity fund contributions for the year. At the end of the tax year you may find a further opportunity to contribute to your RA. Your deductions are limited to the greater of 15% of taxable income from nonpensionable income, R1 750, or R3 500 less your pension contributions in a tax year.

The remuneration you receive can be divided into retirement funding income and nonretirement funding income. The distinction between the two can become complex. In simple terms, retirement funding income is income used to determine your contribution to a pension or provident fund. The remaining income is the nonretirement funding portion.

Items which usually form part of nonretirement funding income are bonuses, overtime pay, payment for special skills, travel allowances, commission and net rental profit. This distinction is more relevant to salaried employees. If you are a business owner, you are potentially able to deduct the full 15% of your income if used for contributions to an RA.

A word of caution regarding travel allowances. The taxman will tax you on any travel allowance not used for business travel. Therefore if you get a travel allowance of R5 000 a month or R60 000 a year and only use R20 000 during the year for business travel, you will be taxed on the remaining R40 000.

When calculating your RA capacity, only use the R40 000 in calculating nonretirement funding income, not the full R60000.

Your financial planner should manage your RA tax planning at your annual review meeting as required by the six-step financial planning process endorsed by the Financial Planning Institute.

However, it is not always possible for your financial planner to be aware of changes to your tax position during the financial year. You should therefore always inform your financial planner of any changes to your tax position.

If you are concerned that you are buying units in the underlying investment in the RA fund at a market peak, you can select a more conservative investment with a higher cash portion. Or you may select an aggressive investment strategy and phase your investment in over a couple of months to negate potential volatility. In this way you will still be using your RA capacity for the tax year.

A final word: even though you have until February 28 to make retirementannuity fund contributions, it becomes difficult to finalise cases in time when contributions are made after February 20. Be proactive. Contact your independent fee-based certified financial planner. If you do not have such a financial planner, visit the website of the Financial Planning Institute of Southern Africa on www.fpi.co.za to select one.

Debbie Netto-Jonker, CFP™, is founder of Netto Financial Services and was financial planner of the year in 2001.