It’s Retirement Top-up Time!

Make the Most of Your Tax Benefits.

December 2018 finally saw the end of a highly volatile environment for investors around the world. Global Equity Markets posted their worst performance since the Global Financial Crisis; SA Listed Property fell by – 25%; and only 2 out of the 164 General Equity Funds in South Africa delivered a positive return. This was after the SA Equity Market managed to return 4.3% during December, with a dismal total return of – 11.5% for the year. We have survived the worst 4-year period on the JSE (South African stock exchange) in the past 25 years. Loyal investors were only rewarded with a compound return of 4.5% per year during this period, which is not only below cash returns, but also below inflation which has averaged 5.4% over the past 5 years.

We urge our investors to take a moment to look through all the short-term noise and chaos and ask themselves the important question; ‘have my investment goals changed?’ This is the only time we should be adjusting your investment strategy. If we react to each and every market wobble, we can guarantee that we will lock in losses, miss out on recovery trades, and not be able to deliver on your long-term objectives.December 2018 finally saw the end of a highly volatile environment for investors around the world. Global Equity Markets posted their worst performance since the Global Financial Crisis; SA Listed Property fell by – 25%; and only 2 out of the 164 General Equity Funds in South Africa delivered a positive return. This was after the SA Equity Market managed to return 4.3% during December, with a dismal total return of – 11.5% for the year. We have survived the worst 4-year period on the JSE (South African stock exchange) in the past 25 years. Loyal investors were only rewarded with a compound return of 4.5% per year during this period, which is not only below cash returns, but also below inflation which has averaged 5.4% over the past 5 years.

Although our investors were sheltered from the worst of the market corrections through our accurate asset allocation and active management; the resultant returns were lower than what we targeted. Our clients also benefitted from the use of alternative asset classes such as Structured Products, which provided varying levels of capital protection and geared upside; as well as our focus and commitment to reducing fees.

When markets are throwing around healthy returns north of 20% to 30%; giving up 3% to 5% in fees seems fine. However, when your entire return is eroded by fees, it becomes a different story. Equally as important to monitoring the fees you are paying, is making sure your investments are as tax efficient as possible. The less we need to take away your capital, means more to compound and grow over time.

The end of the 2019 tax year is fast approaching, and with it the deadline to make use of your annual tax incentives SARS offers to encourage South Africans to save for retirement.

Here are some key points to remember about Tax-Free Savings Accounts and Retirement Annuity contributions:

Tax-Free Savings Accounts (TFSA):

• No income tax, dividend withholding tax or capital gains tax is applicable.
• Annual contribution limit of R33 000 (R2 750 per month for debit order investors). You will pay a penalty of 40% on the amount you invest above the maximum.
• Current lifetime contribution limit of R500 000.
• Only a natural person with a valid South African Identity Document/Birth Certificate may invest.
• Having more than 1 TFSA is allowed, but limits apply across all investments.
• Amounts withdrawn do not create additional contribution capacity.
• Any contributions paid by a parent on behalf of children/minors will be viewed as a donation (R100 000 annual donations tax exemption applies).

Retirement Annuity Contributions (RA):

• 27.5% of your gross remuneration/taxable income (whichever is higher) is tax deductible.
• Your annual contribution is capped at R350 000.
• The above applies to all retirement fund contributions; pension funds, provident funds and retirement annuity funds.

According to Section 10c of the Income Tax Act, whatever amount you contribute towards your retirement funds that did not rank for a deduction (i.e. that is greater than the R350 000 each year) may be offset against any income earned when you eventually start to draw an income from your living annuity in retirement, and/or any lumpsum you elect to take at retirement. Hence, you can invest more than the annual cap and allow that portion to grow tax free!

A Retirement Annuity provides a tax-efficient vehicle that can maximise the value available at retirement to convert into a living annuity. It also provides considerable estate planning benefits as any lump sums or annuities received by dependent’s on death are exempt from estate duty, capital gains tax and executor fees. However, any remaining previous contributions which did not rank for deduction, made after 1 March 2015, will be dutiable in the investor’s estate. It is also worthwhile to note that if you formally emigrate through the South African Reserve Bank and South African Revenue Service you can withdraw your RA.

Once you convert your Retirement Annuity into a Living Annuity, your contract is with a South African Insurer, and hence your money stays in SA and will need to pay out in SA. Should you need to expatriate the proceeds monthly/annually, this could be costly and an admin nightmare.

Please contact your Harbour Wealth Financial Adviser should you want to take advantage of these tax efficiencies. Our investment team works hard in constructing optimal investment solutions aimed at maximising long term capital growth and tax savings!

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