It’s a new year as of 1 March 2020 – the new 2020/2021 tax year, that is. It is also a tax year that is being met with some trepidation on behalf of the increasingly stretched tax base. The nation sees the infamous new ‘Expat tax’ coming in on 1 March, as well as growing uncertainty around issues like National Health Insurance. And all this for a tax base which currently makes up less than a quarter of the population according to SARS.
It seems like a terrible time to mention insurance, which is often seen as a grudge purchase. Yet investing in insurance – not just the basic risk cover that life insurance brings, but the investment and savings products that a life insurer can offer – is one of the smartest tax moves one can make in the 2020/2021 tax year.
"In this tough economic climate, financial security has become vitally important to our clients. That is why Liberty's risk, investment and savings products not only secure our clients' financial freedom but have been designed with maximum tax efficiency in mind," says James Coutinho, Senior Manager Group Corporate and Client Tax at Liberty.
Saving for retirement offers generous tax breaks
South Africa has a savings problem and government, with good reason, has tried to make saving for retirement as attractive as possible. Retirement funds such as pension, provident and retirement annuity funds ('RA's) are ideal for your long-term savings objectives. They offer you tax deductions for your contributions, the growth in the retirement fund is tax-free and you may also get some tax relief when you retire.
Contributions to a retirement fund are tax deductible up to 27.5% of either your remuneration or your taxable income – whichever is greater – with a total tax deduction cap of R350 000 per annum. A client who has annual taxable income of R200,000 could invest in an Agile RA and make tax deductible contributions up to R55,000. It is important to remember however that the contributions to all your retirement funds will be taken into account in determining your deductible limits. Any contributions you make in excess of the deduction limits can be rolled over to succeeding tax years and if you don’t use the deductions before you retire, you will be able to get the value of your non-deductible contributions back when you retire, as tax-free amounts on your retirement lump sum and annuity benefits.
The hard work of saving for your future will eventually pay off, since all the growth in your retirement fund is exempt from income tax, capital gains tax and dividends withholding tax. This means that you benefit from tax-free growth up until the date you retire.
Depending on what retirement fund you belong to, you may be entitled to access your retirement benefits as a cash lump sum, annuity or combination of both. Lump sums are taxable in terms of a specific tax table where currently the first R500,000 is tax-free and the balance of your lump sum will be taxed from 18% and 36% depending on the value of that lump sum. Your annuity will be subject to tax at your marginal tax rate.
Tax free investments are just that tax-free
In South Africa, the eighth wonder of the financial services world may well be tax free savings – especially in a time where growth keeps stagnating and the tax toll keeps climbing. Tax free investments were introduced in 2015 specifically to make medium-term savings as juicy as possible.
"There is no downside when it comes to investing in a tax free investment. Not only will all the growth in your tax free investment be free from income tax, capital gains tax and dividends withholding tax, all your withdrawals will be tax-free too,' says Coutinho.
The one thing to remember is that your 'after-tax' contributions across all your tax free investments are limited to R33 000 per annum, with a lifetime contribution limit of R500 000. Being a client of a financial services group like Liberty ensures that you gain access to top tier tax free investment options. The new and improved Stash application, for instance, is a slick new way to harness the power of tax free savings with your normal bank account.
Investment policies are subject to lower tax rates
Liberty offers a wide range of local and offshore investment policies that are ideal for all your investment needs. As Liberty pays the tax on your behalf, investments made by individuals are subject to an income tax rate of only 30% and an effective capital gains tax rate of only 12%, which are much lower than the 45% income tax rate and 18% effective capital gains tax rate for high income earners. Investors not only get the benefit of diversified portfolios but preferential tax rates.
As the growth in the investment will have already been subjected to tax, the policy maturity benefits will generally be regarded as capital in nature and exempt from capital gains tax in the hands of the original beneficial owner, the original owner's deceased estate, spouse, dependant or nominee. This means that you will not have to worry about paying any further tax on your policy maturity benefits. Add to this the fact that if a beneficiary is nominated on your investment the death benefits pay directly to that beneficiary and result in a saving of executors fees, as well as immediate cash in hand for your beneficiary.
Your loved ones get a tax break if something should happen to you
While you won't generally get tax deductions for the contributions you make to your life insurance and disability risk policies, at least your family members won't be taxed on the policy benefits they receive.
"Life insurance benefits received on death, disablement, illness or unemployment are generally exempt from income tax and are also exempt from capital gains tax if they are payable to the original beneficial owner, the original owner's estate, spouse, dependant or nominee,” says Coutinho. “Remember though, that although these benefits are generally 'tax-exempt', death benefits will generally be subject to estate duty in the deceased's estate."
Remember, paying taxes is part of any financial plan
Ultimately, the purpose of life insurance, investment and savings is to safeguard your financial future and that of your family against life’s unpredictability. While getting some tax slack is a good thing, death and taxes come to us all. Paying tax is part and parcel of securing your financial freedom.