We’re all looking for a great deal and value for money. But not a lot of people know where they can find even bigger discounts than on Black Friday or Cyber Monday. The answer is with the great tax rebates they get when they invest in a retirement product. That’s why we are naming 29 February 2024 “Tax Thursday”.
We do it a bit tongue-in-cheek because people can put extra money into their retirement annuity throughout the year. “Tax Thursday” is just the final cut-off date to make sure they can get as much money back from the tax man as they can before the current tax year ends. The real value they will earn for themselves in this way is incomparable.
The best is, in practice, it means the government is giving you back something in your pocket. In fact, the rebate gets bigger the higher your tax bracket is .
Let’s say you usually pay tax of 31% on your income. For your retirement investment, this means that you will get back 31% or R310 of every R1 000 you invest. This implies that your investment of R1 000 is costing you only R690 – you’re getting more than a third “for free”. You get your tax rebate when you submit your tax return.
If you reinvest this tax rebate into your retirement product the next year, you can get an even bigger tax rebate during the next 12 months. There is a limit to how big your tax rebate can get, but this only kicks in for people at a very high-income level.
All of this means the value and “discount” you get on your retirement product is far more profitable than the 5% or 10% discount you’ll get on a washing machine or computer. And it’s much more real than any marketing gimmick.
The growth on a retirement investment is also tax-free, which means you’ll only start paying tax on your income from your investment when you retire. Chances are that you may also be in a lower tax bracket by then.
Up to now a retirement annuity has often been called an inflexible investment. This is because you can’t access any money until you turn 55. Some people like this kind of “forced discipline” of not being able to access their investment. For others, the new two-pot retirement system will offer some relief in emergencies. Government is yet to announce the final implementation date, but sooner rather than later people will be able to access some retirement money when they are in a tight spot.
No other product can give you the tax benefits of a retirement annuity – it is the most tax-efficient investment you can get.
A tax-free investment also offers significant benefits like tax-free growth and withdrawals. But you don’t get a tax deduction for money you invest and there are yearly and lifetime limits to how much you can invest. Still, because you don’t pay any tax on the tax-free investment, the value of your tax-free investment after 20 years could be almost double that of a normal other investment like in a unit trust.
We often get people who ask how much money will be enough for retirement, especially if they are contributing to a retirement fund at work. Entrepreneurs and people who don’t earn a fixed salary ask the same thing. The short answer is that each person’s circumstances are different. That said, a rule of thumb that the industry uses is investing 18% of your gross income. This is if you start saving as soon as you start working. The beginning of the year is a good time to calculate how much you are contributing.
It’s time to make the most of your Tax Thursday discount and let government help you invest for your future self.