Investment

“The avoidance of taxes is the only intellectual pursuit that still carries any reward. (John Maynard Keynes)

1. Boost your retirement savings

Contributing to a Retirement Annuity (RA) before 28 February can reduce your taxable income and grow your long-term wealth. If you haven’t maximised your annual tax deduction for contributions to retirement funds, this is a good moment to review it. Got any questions – ask us.

2. Top up your Tax-Free Savings Account (TFSA)

Each member of your family (even minor children) can have a TFSA and you can contribute up to R36,000 per year to each account. Interest and dividends paid from and capital growth inside a TFSA are completely tax-free, making it one of the most powerful long-term investment tools available.

3. Consider making a section 18A donation

Donations to qualifying Public Benefit Organisations (PBOs) and some other donees that are approved to issue section 18A receipts, are tax-deductible (up to 10% of taxable income). If you’re planning to give, now is a good time to do so.

4. Review your investment gains and losses

If you’ve realised capital gains this year, you may be able to offset them by realising losses on underperforming investments. This is known as “tax‑loss harvesting” and can help reduce your capital gains tax. If you’re unsure if this applies to you, we can definitely assist. There is also a CGT exclusion (up to R2 million in gains) on the sale of your primary residence so the timing of your house sale may have big tax implications (positive or negative).

5. Check your interest income

South Africans enjoy an annual local interest exemption of R23 800 (R34 500 for individuals 65 or older). If your interest income is close to or above the threshold, it may be worth reviewing where your cash is held and whether a more tax-efficient structure makes sense. Our advice here could be crucial.

6. Gather all your Tax Certificates

Make sure you have the necessary documents from your investment platforms, including:

Interest and dividend statements
Capital gains summaries
RA and TFSA contribution reports

These will make your tax return smoother and help avoid SARS mismatches.

7. Review medical and other allowable expenses

If you’ve had out-of-pocket medical costs or other deductible expenses, gather those records now so they’re ready for your return.

8. Provisional taxpayers: Double‑check your estimate

If you’re a provisional taxpayer, your second payment is due at the end of February. Ensuring your estimate is accurate can help you avoid penalties later.

A stitch in time saves nine

If you’d like help reviewing any of these items or want to explore opportunities specific to your financial plan, we are here to support you.

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.

“The two-pot system is meant to support long-term retirement savings while offering flexibility to help fund members in financial distress.” (National Treasury)

With two new pots added to what used to be the one-pot South African retirement system, fund members can now access a portion of their retirement savings before retirement, while still preserving savings for retirement. There are, however, immediate and long-term tax and other implications that should be carefully considered!

The three pots of the new retirement system

Tax and other issues

Withdrawing from any of the pots should be approached with caution. In addition to the fees that will be charged, and the potentially devastating impact on your eventual retirement savings, there are also tax implications that must be carefully considered.

It’s significantly more expensive from a tax perspective to withdraw retirement funds before retirement age (normally 55), because the Withdrawal Benefit Tax Table or Individual’s Tax Table will apply. Instead, waiting until retirement to access savings – when the Retirement Fund Lump Sum Benefits or Severance Benefits Tax Table applies – is a far better tax option.
Up to R550,000 drawn as a cash lump sum at retirement may be tax free. However, this R550,000 is a cumulative withdrawal total over your lifetime. That means this tax benefit could be eroded by pre-retirement withdrawals.
Transfers from the Vested and Savings pots into the Retirement pot are also tax-free.
Employer contributions are still treated as taxable fringe benefits.
Early withdrawals from your Savings pot are considered income and are subject to income tax as per the tax directive the fund manager will request from SARS. What’s more, any outstanding taxes you owe SARS will automatically be deducted if you make a withdrawal.
Depending on your annual income and the amount withdrawn, a pre-retirement withdrawal from your Savings pot – taxed at your individual marginal tax rate – could also push you into a higher tax bracket. This would mean paying more tax on all your income for the year. Here’s an example of the potential impact of withdrawing R80,000 from your Savings pot. Waiting until retirement age to withdraw the same amount could be tax-free.

Hidden costs of early withdrawals

Your full retirement fund contribution (one-third Savings pot; two-thirds Retirement pot) is still tax deductible up to 27.5% of annual income, up to a maximum R350,000 per tax year. This remains one of the biggest tax breaks out there, but is effectively cancelled out by the tax payable on an early withdrawal. Early withdrawals also have another cost – the loss of tax-free growth that could have been earned on your savings.

Continuing with the example above, if the R80,000 is not withdrawn, but instead left to grow at an average annual return of 10% for 25 years, the projected returns are R866,776 (equivalent to R201,958 in today’s terms assuming 6% inflation). This means you could lose tax-free growth of R121,958 by withdrawing just R80,000!

Help is at hand!

Understanding the tax and other implications of early retirement fund withdrawals in the short term and at retirement will help you to make better-informed financial decisions.

Early retirement fund withdrawals are likely to be more expensive in tax and lost investment growth compared to other options such as overdraft facilities, credit cards or home loans.

Please talk to us if you or any of your employees are considering retirement fund withdrawals. We’re here to help!

Your Year-End Tax Checklist: Smart Moves Before 28 February