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With the end of the tax year approaching, this is a good time to revisit your investment portfolio and ensure you are optimising your investment strategy and the tax benefits available. This can have a game-changing effect if done right.

Retirement planning

Let’s talk about optimising your retirement funds and Section 10C. Contributions to a retirement fund are tax-deductible. This can consist of a combination of a retirement annuity and a pension or provident fund with your company. These contributions can be deducted from your income up to a maximum of 27.5% of your remuneration or taxable income, capped at R350 000 p.a.

If you exceed these contributions, you start building up a “pool” of contributions referred to as your disallowed contributions. You can withdraw R550 000 tax-free at retirement, provided you have not previously made withdrawals. Because you can add these previously disallowed deductions to the tax-free portion of the cash lump sum you withdraw at retirement, the tax-free amount can be increased infinitely. If you can build up a substantial disallowed contribution “pool”, you can increase this to a few million over your working life.

Once retired, the portion of your retirement portfolio you didn’t take as a cash lump sum gets converted to a life or living annuity. The income you earn from this investment is taxed on the income tax scale. This is where the benefit of Section 10C of the Income Tax Act becomes applicable. Whatever portion of your disallowed contribution “pool” is still available can be offset against this income. Essentially, for years, you can earn a tax-free income by utilising your disallowed contributions.

This is also another strategy for optimising your estate planning. A retirement annuity and a living annuity are excluded from the estate. By contributing more lump sums to a retirement annuity, you will benefit from a large disallowed contribution pool (more to offset) and move these funds outside of your estate. You can “retire” from the retirement annuity and transfer these funds to a living annuity. Your beneficiaries will benefit from both products.

Tax-free investments

Optimise your tax-free investment. You are allowed to invest R36 000 p.a. and R500 000 in your lifetime. If you contribute at the annual maximum rate, it will take you approximately 14 years to reach the allowed limit on this investment. You can still leave this portfolio to benefit from compound interest after reaching the limit.

If you contributed monthly for 14 years and contributed the maximum over this time, assuming an average return of CPI + 6% p.a., at today’s inflation rate, you’d already have a fund value of R1 228 958.93. Let’s assume these funds are left another 15 years to benefit from time in the market, growing at the same rate. Now, your fund value has increased to R6 726 787.54. This can be accessed 100% tax-free, thereby supplementing your potentially tax-free income earned from your living annuity with income from your tax-free investment.


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