What taxpayers can do to save a little more, and earn more in retirement

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SIMON BROWN: I’m chatting now with Stian de Witt, executive head of financial planning at NMG Benefits. Stian, I appreciate the time. The budget last month: a lot of folks said there was not much happening (in it) and there were bits: certainly we saw slight increases to personal tax thresholds, some changes to tax, to medical tax credits, which benefited people.

But there are other bits and pieces that we as savers, as investors, can do to benefit and take a little bit home, save a little bit more and earn a little bit more in our retirement.

STIAN DE WITT: Yes. Thank you, Simon. One of the things (where) it has been a while since that was promulgated in law is the tax-free savings account, the tax-free savings investments that people can utilise. But one thing that’s important to understand is that there’s a difference between a tax-free savings account and a tax-free savings investment.

The one invests into normal savings. With savings you’ll probably get your money-market rates or even just a fixed-deposit rate. With the other one, through a unit trust fund manager you can go into investments offshore [or] local, which will give you a higher return, obviously with some volatility in it. But that’s R36 000 per annum to a total of R500 000 over your lifetime that you can invest into those vehicles where you don’t pay any capital gains tax, no dividends or any interest on any of those instruments.

However, it’s important that to note that the payment into the fund is not tax deductible. You only get the tax-free portion. And therefore it’s also important to make sure you utilise your other tax rebates on your interest and your capital gains tax; you can go up to R500 000 in a unit trust portfolio before accessing those thresholds where you are going to start paying tax. So that’s one of the things that the consumer can do.

SIMON BROWN: And that’s a good distinction as well between the tax-free saving – and I like your point around the account versus the investment – the tax-free and the retirement annuities.

[With the] retirement annuities the tax deduction happens in the year of the deposit, whereas [with] the tax-free savings that benefit is actually when you withdraw the money.

STIAN DE WITT: Yes. So on your retirement annuities the same … your (contributions to) retirement annuities, your pension, your provident funds all combine; you can save a total of 27.5% (of taxable income) per year towards that (or) have a full tax deduction to a maximum of R350 000 a year (whichever is lower).

Now, one of the practical ways in which you can do it – if you do a monthly contribution – is you can either do it monthly or [in] once-off lump sums. You go to your HR [human resources department] and say, would you mind, here is my certificate, or here is my policy schedule, would you mind just utilising this now and doing a tax deduction out of the month that I’m contributing, so that I get that deduction now.

Someone used to tell me that money in my pocket is always better than in someone else’s pocket.

SIMON BROWN: So you get that saving monthly, rather than claiming it back (via a tax return).

STIAN DE WITT: Yes. And then the other thing that’s important that I say to people is to keep in mind that you can [put] up to R2 million into your retirement fund and then, when you retire, if you have a proper financial planner that helps you in the process, you can get that R2 million tax-free out of that investment over your lifetime. So on that contribution you get the full tax reduction, but on the income you don’t want to pay tax.

SIMON BROWN: I’ve got you… It’s also around if you put excess in, say I hit my R350 [000] limit – If I put more in I can actually claim that in subsequent years.

STIAN DE WITT: Absolutely.

And then what’s important, as with the tax-free investment, remember on the growth of that investment there’s no tax and it also falls outside of your estate. So it helps with the estate planning process as well.

SIMON BROWN: And another [thing]. The solar panels (rooftop solar tax incentive) – there was some criticism that it was fairly small and fairly niche, but it’s not. Again, these are small amounts perhaps in some places, but they’re worth doing, because they start to add up. It’s 25% of the cost of the panels only, not batteries and installation, up to a maximum of R15 000. But you’ve got to move fast because this is only for this year.

STIAN DE WITT: Yes. There is a lot of criticism about it but, you know what, that’s a maximum of R15 000. Remember, that R15 000 is a direct bottom-line saving on your tax. So it’s not like on an RA where you only get a portion of it, say. So if you have R80 000 to spend or R60 000 to spend on solar panels, that 25% that you get as a rebate, that R15 000, is a direct saving on your tax bill at the end of the year.

SIMON BROWN: What about endowments? These were a huge rage many, many years ago. They seem to be coming back. They certainly are. My understanding is for those who are in a higher tax bracket there are benefits to endowments as well.

STIAN DE WITT: Yes. For endowments, obviously on an individual capacity there is a 30% tax that you pay inside the endowment. [On] the contribution you don’t get any tax reduction. And the moment the money is withdrawn or matures, you obviously don’t pay any tax. But I think it’s very important that to utilise an endowment you must first utilise your other tax benefits regarding your interest and your capital gains tax exemptions in your unit trust portfolios and stuff like that, because a lot of people say they use it for their children’s education or something like that. But the fees and the tax involved in those portfolios are higher than you would get in another scenario.

So [for] someone with a 40%/45% tax bracket who has utilised all the other exemptions, yes, it makes absolute sense. But before [that] don’t even go into an endowment.

SIMON BROWN: I take your point. You use up everything else first and you need to be in that higher tax bracket. The numbers simply don’t add up.

We’ll leave it there. Stian de Witt, executive head of financial planning and NMG Benefits, I appreciate the early morning.

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