Traditionally February is our busiest month because it is the end of the tax year – this means it is the month to do the 2nd Provisional tax return (and payment) and also RA top-ups.
Over the years RA’s have received a bad rap – this is mostly a function of the poor returns and penalties that have been associated with RA’s taken out through the life insurance companies. Today, unit trust and passive fund RA’s are commonplace. Does it still make sense to put money into an RA?
To my mind there are at least 3 reasons to put funds into an RA, they are: tax, estate duty and protection from creditors. Below is a quick look at each of the points.
Tax saving: you can currently put up to 15% of your non-retirement funding income into an RA. Your effective contribution will be a function of your marginal tax rate i.e. if you are in the 40% tax bracket then you will receive a tax benefit equal to your marginal rate. For example – if you are in the 40% tax bracket then R100k into an RA will effectively only cost you R60k. On top of this there is also no Capital Gains Tax or tax on interest on retirement funds.
Money in an RA is not part of your estate: money in retirement funds (pension, provident and RA funds) is not part of your estate and as a result there will be no estate duty paid on this amount. For example, at his death, Gregg has an RA worth R10m, a house valued at R3million and unit trusts valued at R500k. He leaves it all to his children. His total dutiable estate is only R3.5million and therefore there will be no estate duty payable. His children will receive the proceeds of his RA and will have to make a choice about how the funds will be paid to them – traditionally this is via an annuity and will then be taxed as income in their hands. If he had R500k in the RA and R10m in unit trust funds then the dutiable estate would be R3.5m + R10m = R13.5m and the estate duty payable would be R2m (20% of R10m).
Money in an RA is protected from creditors: this is particularly attractive to self-employed people who run the risk of having their creditors trying to attach assets in the event that something goes wrong with their business.
In the past there was also some resistance to putting funds into an RA because the money was locked into SA – rules around this have changed and if you formally emigrate from SA then you can withdraw the funds (you will be taxed) and take the proceeds with you.
Just for the record, I am practising what I am preaching and am putting the 15% into a passive RA. Sadly, government’s atrocious track record of dealing with corruption added to the recent activities at SARS seem to be undoing the past 10-15 years of good will that has been fostered by SARS amongst tax payers. Where previously there was a sense of “good citizenship” when it came to paying tax, there now appears to be an increasing reluctance and even resistance to paying tax again. The good work seems to be unravelling – so from my perspective, the less tax I have to pay now, the better. Time to top-up my RA.