In this week’s episode, Warren Ingram delves into the complexities of optimizing retirement funds within the South African context. He offers strategies for individuals aiming to maximize their retirement savings and achieve financial security. We also highlight the importance of utilizing the 27.5% taxable income contribution to gain significant tax rebates and strategically navigate the 350,000 ZAR ceiling, enhancing future financial stability.
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Have a question for Warren? Don't forget to voice note your questions through our WhatsApp chat on (+27)79 807 8162 and you could be featured in one of our episodes. Follow us on Twitter, LinkedIn and subscribe to our YouTube channel for more Financial Freedom content: @HonestMoneyPod
In this week’s episode, Warren Ingram delves into the complexities of optimizing retirement funds within the South African context. He offers strategies for individuals aiming to maximize their retirement savings and achieve financial security. We also highlight the importance of utilizing the 27.5% taxable income contribution to gain significant tax rebates and strategically navigate the 350,000 ZAR ceiling, enhancing future financial stability.
Themes/Topics:
Don't miss out on Warren's invaluable insights
For more valuable insights from the 10x team, click here.
Have a question for Warren? Don't forget to voice note your questions through our WhatsApp chat on (+27)79 807 8162 and you could be featured in one of our episodes. Follow us on Twitter, LinkedIn and subscribe to our YouTube channel for more Financial Freedom content: @HonestMoneyPod
Welcome to Honest Money. We're doing a little bit of a different format today because we've been getting a batch of questions from you around tax and what you do with your money and especially you know when it's the beginning of the tax year. There's a lot that you should be doing in preparation and if you still haven't managed to do all your contributions for the end of a tax year, that's also important. So I thought I would kind of just batch them and talk you through my thoughts around tax planning, especially at the end of a tax year and the beginning of a new one. So for those of you that don't know, the tax years in South Africa don't run from the 1st of January to the 31st of December. They run from the 1st of March to the end of Feb, and 2024, end of Feb is 29 Feb, so we're getting an extra day in the year, and so that's important to understand from when you're doing your investment planning, because you are allowed to make some pretty big contributions to retirement funds in a normal tax year and you get quite a big tax break for doing that, and by making those contributions before the end of the tax year you're in a position where you can save some tax. Maybe that you have to pay at the end of the financial year or, sorry, at the end of the tax year, or you might get yourself a refund from SARs if you play your cards right. So just to explain everything that we earn, that SARs considers taxable income and I'll explain what that means now. But we can contribute up to 27.5% of our taxable income to a retirement fund. There is an annual limit of 350,000. So you can contribute up to 350,000 to a retirement fund and then get a tax break on those contributions. And if you do, what happens is SARs will look at those contributions and then reduce your income tax that you owe them accordingly. So just to give you an idea retirement funds for most of us.
Speaker 1:If you're employed, you would generally have a company provident fund and the company might be paying some money on your behalf and you'll be paying some money and your salary would then pay a little bit less tax on the salary because of these retirement fund contributions. So for employees it's usually a provident fund. Some companies still have pension funds and then if you're a gig worker or a commission earner, you might have your own retirement annuity and then some people have a combination of a company provident fund and their own retirement annuity or RA on the side. So all of those are retirement funds and the important thing to understand about retirement funds is the money that you put into a retirement fund. Once it's invested, it grows with outpaying income tax. It grows with outpaying capital gains tax and no dividends tax. So if you've got money growing in your retirement fund for a period of 30 years, all of that growth inside will be tax free. So the kind of compound benefit of money going into a retirement fund is really material because a normal investment let's say you've got cash in a bank you're going to be paying income tax on that cash every single year for 30 years. So you're not getting the compounding effect of the money growing on itself and then only paying tax once right at the end. With cash in the bank, you're paying tax every single year. So every year there's a little bit less money that you've got to grow and to invest and the compound effect of that is very significant. So I think understanding that our like retirement funds because of that compound growth benefit of the money growing tax free, it's actually very important. The second benefit then is that you're paying less income tax every year and, as I said at the start, you might be paying less income tax on your salary every month because your employer says we can see that you're contributing to retirement fund, so we're going to reduce your taxable salary by the amount that you're contributing to the retirement fund. Or if you're contributing to an RA on your own and you're in a gig worker or part time worker, you might be paying normal tax. You know you might be paying full income tax and then able to claim a refund from SARS at the end of the tax year. Either way, you're saving tax by making those retirement fund contributions. So for me, I think that retirement fund contributions are important part of investment planning and certainly very important part of tax planning.
Speaker 1:What's the downside of contributing to retirement fund? I think just to understand that there are some issues around accessing that money in a year or two, for example if you're 35, and you need to understand that it's quite hard to actually get money out of your retirement fund until you're at age 55 or older. So understand that. They talk about liquidity and so liquidity inside a retirement fund is tough for you to access the money until you're at retirement age. So I mean, I know the South African government's working on retirement fund reforms where they'll allow you to access about 10% of your future retirement fund contributions and that's very nice.
Speaker 1:But as it stands today, a lot of people and the only way they can access their retirement fund is to resign from their company if they're in a provident fund and then pay massive tax on taking some of the money out of their provident funds. I think that's a horrific idea and it should only be done when you're basically at the point where you can't afford to buy food for your family anymore, then look at that. But if you're looking at canning your provident fund so that you can buy a new car, you know that's just such a bad idea. You know, understanding, that it's quite hard to get a job in South Africa. So if you quit your job To access your money in your provident fund, just think about what happens if you don't get a new job. So, so, so let's just say you had a hundred thousand run your provident fund. You quit your job, you losing about 45% of the money that you had in your provident fund to tax because you have to pay SARS for the money that you've taken out of that provident fund and then you don't have a job. So so you know, only have, you know, 55,000 around and no way to replace that money because you don't have a job.
Speaker 1:That happens a lot in our country and I just think it's a tragedy and a lot of people just see the money building up in their retirement fund as, as they're kind of, you know, nest egg that they can use during their careers, and it's just not a good idea. As I say, obviously you know if there is a real emergency kind of close to you know life and death by all means, but you know a new phone and you car, you know extra payment into your bond, those are not life and death. You need to make another plan. So for me, I think you know that the retirement fund story is important and, and you know, allowing some of your money to go in is valuable. The reason that some people want to contribute the maximum to retirement fund remember I said it's 27.5% of your taxable income Is because they're worried about this access to their money. So what you might find some people doing is that they contribute 10% of their taxable income or 15% of their taxable income and then the rest of their salary, they pay their taxes, you know, as normal, and then they save that money in an exchange traded fund or a unit trust or Any other investment, and so I think doing a blend of those two is not a bad idea. If you know, if you're worried about accessing money In your retirement funds, to me that that that's a much better strategy than contributing 27.5% of your taxable income to your retirement fund and then you know five years later having to cash it all out, paying the massive tax because you didn't have any emergency funds. So I think trying trying to some emergency fund planning where you put money in a money market account or you know unit trust that that stores cash for you as your emergency fund and you know that, just as a reminder, that's three to six months worth of your expenses and then the balance you can start to contribute to your retirement fund.
Speaker 1:The other account that I really like is is tax free savings account, and and just to explain the difference between that and the retirement fund, all the money you put in a tax free grows without tax and there are no restrictions on when you can access the money from your tax free savings account. So so from that perspective. There is access to money. Just to remember that when you access that money it's a use it and lose it's principle. And just to expand, the government says we can contribute 36000 a year is a maximum to a tax free savings account and over our lifetime it's it's 500000. So so 36000 a year and once you've done that for kind of 15 years or so, then you get to the point where you've contributed the maximum and then you won't be allowed to add any more unless they change the law in future. But let's just say you put in 400000 and you decide that you want to draw 100000 and out of that tax free account in the future. You're allowed to do that, there's no restrictions. But what will happen is that 100000 and will be deducted from your lifetime capacity. So you put in, you put in a certain amount of money, you've not drawn out 100000. That means now that your lifetime capacity has gone from 500000 down to 400000.
Speaker 1:Important point that your tax free is a long term savings, not a short term. Emergency fund, holiday fund, handbag fund, cell phone fund, new shoes fund. It's really for long term growth. The big, the big other difference with the tax free is that you don't get a tax break from SARS for making contributions to your tax free account. It's after tax money but it then grows tax free. So the two are quite different, I think.
Speaker 1:For people that can afford it, you know, maximizing your tax free contributions every year is a no brainer. And then you know, doing at least a 10 or 15% a year in your retirement funds is a very good idea, always making sure that you've got your, your emergency fund planned out and ready to go. So for me those are kind of the key points around tax planning and I think you know you should be doing this throughout the year. You know, if you can, you know, do a debit order into your retirement fund so that you're not stressing at the end of January going into Fibre trying to find a way to get a lump sum to put into your array. But if you do your planning well and you've got access to capital, then of by all means, you know you should really, in January and fair, be looking at what you've paid, what you've earned as a taxable salary and what you've paid in tax, and then saying, okay, if I, if I top up my retirement fund contributions by another 50 or 100,000 Randers an example, I'll get a quite a nice tax break, you know, if you contribute 100,000 and you're paying the maximum to SARS, you know you might get back 45,000 Rand. So it's quite a nice you know tax break. I think it's something that's really valuable and often underplayed at the moment.
Speaker 1:Then the last comment around retirement funds is that the law changed a little while ago as to what these retirement funds can own. One of the big criticisms of retirement funds was that they were very limiting because you could only allocate about 25% of your capital to international investments within your retirement fund. That's now changed and retirement funds can go up to 45% of their value in international investments. Your options for retirement funds are very wide. There's a huge amount of scope to buy local and global bonds or cash or property or shares, so they are attractive. Now, as the law is going to change around how much you can access of your retirement funds on a yearly basis, that access to money story the liquidity story is also going to be less of an issue.
Speaker 1:I think we should be doing a lot with our retirement funds as investors, getting that tax regrowth, and take advantage of any tax breaks that SARS gives you. We pay so much tax in South Africa. We should be using every tax break we can get. I hope that helps and has covered the kind of breadth of questions that you've been sending. Thank you so much for sending your questions. Please keep firing them in. I'd love to answer what you want to know and it helps me with topics every week. So thank you.