Making the most of your tax-free incentives in an RA and TFI

Published February 2020

For South African individual investors, retirement annuities (RAs) and tax-free investments (TFIs) offer significant tax breaks that can be used to their advantage.

RAs are generally used by people who do not belong to a company pension fund but rather contribute to their own retirement. RAs are taxed on an EET basis (exempt contributions, exempt investment returns, taxed withdrawals) so have the benefit of tax-deductible contributions upfront but face the downside of taxed withdrawals in retirement.

When a tax-free investment makes sense

If an investor already has an RA or a workplace retirement fund and has some cash at the end of each month, or an end-of-year bonus, for example, a TFI is worth considering. You can invest between R250 and R3 000 via a monthly debit order, or a lump sum of up to R36 000 per tax year, and up to a maximum of R500 000 over your lifetime.

While there is no tax break when contributing to a TFI, no tax is accrued during the investment period and all proceeds withdrawn from the investment are tax free.

Investors therefore have complete tax certainty and do not have to worry about facing a larger-than-expected tax rate when they withdraw funds from their investment in future.

TFIs also offer a wider range of investment options than RAs and investors with a long-term investment horizon can invest in a more aggressive portfolio which allows for higher expected growth than that achieved by the more constrained investments of an RA.

Better to invest than to save

Both RAs and TFIs are transferable between providers. Many TFI investors hold a deposit-linked investment with a bank. It currently makes sense to consider moving this investment to a unit trust- based TFI, which usually offers greater access to growth assets (such as equities and listed property stocks) and therefore the potential of larger upside if held over the long term.

It is better to invest than to save. The sooner you invest your life-time allowance, the more you will reap the rewards of long-term investing and the power of compounding.

Coronation’s TFI product offers access to our range of domestic flagship funds. We have also added a number of our rand-denominated international flagship funds to the selection.

You can switch between funds, or withdraw money as your circumstances change. Just be mindful that all amounts invested will count towards your annual and lifetime limits regardless of any withdrawals you make – you cannot ‘replace’ the money you withdraw with a new investment.