The tax implications of an RA, unit trust and tax-free investment
Investors need to consider various tax implications when comparing the three product options.
Question: I am 55 years old and earn R25,000 a month. I have no retirement savings and want to invest R5,000 a month to supplement my spouse's pension. Should I invest this in a retirement annuity (RA), unit trust or tax-free investment?
Answer:
Each of these products has its own tax structure in terms of tax breaks when you invest the money; tax on the investment build-up; and tax applied to any withdrawals.
You will need to take these into account when comparing the three product options. (See the table below.)
I will take you through the typical calculations a financial planner would make.
For the calculations, I will work on you investing R5,000 a month for the next 10 years. I have assumed that inflation will be 5% and that the investment returns will be inflation +4%.
Retirement annuity
The R5,000 investment you make to the RA will come off your taxable income. This will save you an amount of R1,300 in tax each month. (See table on the top right.) You can invest this additional R1,300 a month in an RA, which means your R5,000 investment is actually R6,300, with the South African Revenue Service (SARS) in effect contributing the additional R1,300.
If you invest R6,300 a month for 10 years, the investment should be worth R1,203,842.
Now, with an RA, you are allowed to take one-third as a lump sum and the balance as a pension. (See the table below.)
As you haven't taken a retirement lump sum before, the full amount of the lump sum will be free of tax, as the first R550,000 of a retirement lump sum is not taxed.
It is recommended that you take a 5% drawdown from your retirement capital. This will give you R40,128 a year. This is too low to attract income tax, so your income and lump sum would be tax-free. (See the table below.)
Tax-free investments and unit trusts
You can only invest a maximum of R3,000 a month in a tax-free investment, so I will work on you investing the remaining R2,000 in a unit trust. After 10 years, the investment would be worth R1,007,288. (See the table below.)
Drawings from the tax-free investment would not attract tax, whereas the drawdowns from the unit trust would trigger capital gains tax (CGT). However, the gain on these drawdowns should fall within the annual R40,000 CGT exclusion, so no tax is payable. The key difference is that the tax break when you invest the premiums makes the retirement annuity (RA) an attractive option.
Returns
I did some calculations and the unconstrained investments would have to deliver returns that are 5% better than the RA for the end value of the investment to be better than the RA. So, unless this can be achieved by the tax-free and unit trust portfolio, the RA would provide the best solution. DM
Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to [email protected]
This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
IOL News
3 hours ago
- IOL News
Point of view: essential tips for the 2025 Sars tax filing season
Tax Prepare for the 2025 tax filing season with essential tips and insights from Sars. Learn how to avoid common mistakes, ensure timely submissions, and maximise your refunds. Image: Freepik Every year, tax season creeps up on us, and somehow, despite all our good intentions, many of us still scramble at the last minute. With Sars officially opening the 2025 tax filing season from July 7 to October 20, now is the time to get your affairs in order before the inevitable rush. There's good news for taxpayers—Sars has streamlined the process through auto assessments, meaning that a large group of non-provisional and provisional taxpayers will receive pre-completed tax returns based on third-party data from employers, medical aids, and pension funds. Those affected will be notified between July 7 and 20, and if the information is accurate, there's no further action needed. If corrections are necessary, changes can be submitted via eFiling before the October 20 deadline. For those not automatically assessed, tax returns must be submitted manually from July 21 onwards, which is where preparation is key. Sars advises taxpayers to check their banking details to avoid delays in receiving refunds, which can be paid within 72 hours if everything is in order. Now, let's talk about the common mistakes that cost taxpayers time and money. Procrastination is one of them, and I speak from experience. Six years ago, I ignored the deadline warnings and put off filing my return, convinced I had more time. When I finally sat down to do it, I realised there was missing documentation from my medical aid. Panic set in, and I had to chase paperwork in a mad rush. The result? A delayed refund and unnecessary stress. Lesson learned—file early, avoid the headache. Another mistake people make is not reviewing their auto assessment properly. While Sars does a great job pulling data from various sources, your tax situation may have changed—maybe you've started freelancing, received an unexpected income stream, or incurred deductible expenses. Not checking could mean losing out on a refund or unknowingly under-declaring, which could result in penalties. For those in the self-employed or provisional taxpayer category, the filing period extends until January 19, 2026, but that doesn't mean you should delay submitting your return. Filing early means avoiding system crashes, and last-minute errors, and dealing with customer service queues when everyone else is rushing in October. Sars has enhanced support services, including extended customer service hours, updated online platforms, and comprehensive guidance on eFiling. Taxpayers are strongly encouraged to avoid visiting branches, opting instead for digital channels like Sars MobiApp and eFiling to complete their returns. Rhoderic Nel, Sanlam Risk and Savings chief executive, recently pointed out a sobering truth—life-changing financial events can strike at any age. If you're under 35, filing taxes might not seem like a top priority, but missing deadlines or failing to claim rightful deductions could leave you paying more than necessary. So, here's my challenge to you: don't wait until the deadline looms to file your return. Take the time to review your tax situation now, check your documents, and ensure your banking details are correct. If you're lucky enough to receive a refund, it could hit your account within days—and who wouldn't want that? A little preparation now will save you hours of frustration later. Whether you're getting a refund or settling your dues, the key to a smooth tax season is simple: start early, file correctly, and avoid the panic. * Maleke is the editor of Personal Finance. PERSONAL FINANCE
TimesLIVE
13 hours ago
- TimesLIVE
Omoda launches new C9 PHEV in Mzansi: pricing and specs
The C9 PHEV also comes equipped with a comprehensive suite of driver assistance and safety features. These include adaptive cruise control, autonomous emergency braking, blind-spot monitoring, rear cross-traffic alert and braking, lane departure warning and prevention, lane change assist, and traffic congestion assist. Additional systems include front and rear parking sensors, a 540° camera view and a full complement of airbags (front, side, curtain, driver knee, and bolster). Priced at R999,000, the Omoda C9 PHEV includes a seven-year/100,000km service plan, a seven-year/200,000km vehicle warranty, and a 10-year/200,000km warranty for certain electric drivetrain components. It also carries a 10-year/one-million-kilometre engine warranty and a 10-year/unlimited kilometre battery warranty for the first owner (reverting to 10 years/200,000km for subsequent owners). Buyers also receive seven years of roadside assistance.
TimesLIVE
15 hours ago
- TimesLIVE
Joshco bridges housing gap for missing middle residents
Construction is under way on what will become the largest phase of the Johannesburg Social Housing Company's (Joshco) Riverside View project in Diepsloot, which will add more than 700 new units to the growing social housing development. During an oversight visit, Nhlamulo Shikwambana, Joshco's acting COO, said 'the development has already completed three phases, with tenants living in over 300 units, and construction of phase 4 now under way'. 'Once complete, phase 4 will add over 700 more units. This is going to be our biggest build in the area. The plan is to reach over 1,000 units in Diepsloot' Shikwambana said the project is specifically aimed at South Africans in the 'missing middle', those who earn too much to qualify for RDP houses but too little to afford bonded homes. 'We are closing the gap for people who fall through the cracks. Most of our residents come from informal areas. We want them to feel safe and comfortable without being financially overstretched,' added Shikwambana. For many residents, the move from informal settlements to the structured, well-maintained apartments has been life changing. Marriam Tom, 50, sits in her bachelor unit with a sense of peace she says she has not known in years. 'I moved from the informal settlement and this place exceeded my expectations. I stay with two kids in a bachelor, and I have peace of mind because I know my kids are safe. I can leave them behind when going somewhere,' she said. Tom mentioned that 'the maintenance is also excellent'. 'My sink once had a blockage and after reporting, it was fixed within a few days.' Emmanuel Ramangwala, 32, who has lived with his brother in a two-bedroom unit for four years, described it as a major upgrade from his previous living conditions. 'This place gives off luxury vibes at an affordable cost. I'm paying R2,500 and we are more than happy. Transport is easily available outside the complex and Ubers can pick you up at the gate,' Ramangwala said. Kholwani Baloyi, the property supervisor, told TimesLIVE that the demand for the flats, which range from R1,200 for bachelor units to R2,500 for two-bedroom units, continues to grow. Each unit includes a modern kitchen, solar geyser, prepaid electricity, water meters and biometric access control. 'We cater for a range of residents and the demand is very high. Once we open applications, they fill up quickly', said Baloyi. Neo Matshitse, Joshco's acting general manager, said 'these units are meant to bring people out of informal settlements and into secure, affordable housing'. 'Safety features are central to the design. The flats come equipped with 24-hour CCTV surveillance, biometric access control and fenced-off play areas,' said Matshitse. Pfeno Ratovhowani, 28, who lives with her husband and daughter said: 'I am happy there is a playground around the block. I am at peace even when my daughter plays without supervision because there's CCTV everywhere. The place is also well maintained and cleaned throughout the day.' Shikwambana said beyond housing, the project is also helping combat unemployment in Diepsloot by creating job opportunities. Cleaners, security guards and gardeners are hired directly from the surrounding communities'.
