How To Build Up Your Tax-Free Savings Long Before Retirement— The Wynand Gouws Way
1. “Tax plays an important role in planning towards retirement and in retirement. All too often a significant amount of time is spent before retirement in only making use of the “traditional” pre retirement tax-saving mechanisms. Retirees, however, still find themselves short-changed in retirement as tax reduces their monthly income to less than their targeted living expenses, or just keeps eating away at their hard-earned retirement savings “.
2. This is how Lindiwe Malekoa starts her article in BizNews of 26 November 2020 in which she introduces us to Wynand Gouws, a Wealth Manager at Gradidge Mahura Investments, who is offering us the following suggestions on ways to save more tax before retirement and in retirement.
3. Gouws starts off by pointing out that the traditional mechanism used to reduce pre- and post retirement tax is to make contributions to a retirement annuity. You can contribute up to 27,5% of your income, to a maximum of R350 000, towards a retirement annuity, which is deductible from your taxable income and in effect reduces the taxable income payable by you. You can continue contributing towards this retirement annuity in your retirement, since there is no maximum age gap for a retirement annuity.
4. However, Gouws is of the opinion that there are many more effective strategies to reduce tax in retirement. What follow are five strategies that can save you thousands of rand in taxes in retirement and increase your disposable income.
5. First, share the load. It is important to plan for both spouses or partners. By splitting the retirement income effectively between spouses, you can reduce your post-retirement tax significantly. It is also important to use the strategies mentioned below for both spouses/partners in pre-retirement planning.
6. Secondly, build up your tax-free savings long before you retire. Tax-free savings remain an extremely useful planning mechanism. By starting your tax-free savings long before you retire, you can build up meaningful capital that can be used in retirement to provide tax-free income. Up to R36 000 per annum can be invested in tax-free savings investments up to a life-time limit of R500 000. It will take approximately 14 years to reach this limit which necessitates an early start so that your investment grows into a meaningful amount by the time you reach retirement. When investing in tax-free investments 14 to 15 years before your retirement in a balanced fund you can accumulate approximately R1.5 million over that period of time, or R3million for a couple at retirement.
7. Thirdly, invest in a dividend-biased portfolio. A high-yielding dividend portfolio is an extremely effective strategy in building up retirement capital and reducing tax in retirement. The appealing characteristics of a high dividend strategy is that company earnings, and your dividend income, generally grow ahead of inflation, exactly what you need in your retirement to protect you against medical inflation which has grown at a rate significantly higher than inflation. “The earlier you start investing in a high-yielding dividend portfolio the better as you allow both your capital and dividend income to grow over time”, says Wynand Gouws.
8. Fourthly, use your discretionary investments wisely. These investments are those that are not invested in a “retirement wrapper”, namely your investments outside of your pension fund, provident fund and retirement annuity. For most people this would normally include unit trusts, savings or bank accounts and shares. “These investments can be used to further augment your income in retirement; this is done through ‘repurchasing‘ units which can be implemented as a regular monthly payment by most administrators of these investments. Structuring this income needs to be done within the context of your annual Capital Gains Tax exemption (R40 000) per annum”.
9. Fifthly, retirement annuities do have some benefit. Retirement annuities are probably sold for the wrong reasons in retirement and often serve the salesperson and not the retiree. “Using a retirement annuity in retirement may require drawing a higher income to pay for this ‘benefit’. Even though there is a small benefit, due to the ‘tax subsidy’ , if not structured correctly, this benefit can be completely eradicated by the commission and fees”, per Gouws.
10. Gouws concludes that there are a lot more effective ways to save tax in retirement than investing in a retirement annuity. “All of these have an objective of augmenting retirement income with more tax efficient sources of income, including income from tax-free savings, dividends, and discretionary investments. These strategies should ideally be implemented long before retirement”.
SOURCE: BIZNEWS