MICHAEL MARÉ: How to not let taxes erode your retirement investments

SA’s economic landscape continues to challenge investors. The government is under pressure to grow revenue, and the SA Revenue Service has kept tax brackets and exemptions on interest and capital gains static for years. Investors will have to work harder to minimise tax, and will need to prioritise tax-efficient strategies to stretch their retirement savings.

Proactive tax planning can significantly enhance your financial security. This article outlines key investment structures, their optimal use and how to combine them for a tax-efficient retirement plan. 

Tax-efficient investment options 

Several tools can help minimise tax and maximise retirement wealth: 

• Retirement funds (retirement annuities, pension or provident funds) offer tax-deductible contributions and tax-free growth;
• Tax-free savings accounts (TFSAs) provide tax-free growth and withdrawals;
• Annual exemptions for interest and capital gains reduce tax on discretionary investments;
• Spousal investing uses multiple exemptions to lower overall tax; ad
• Endowments suit high-income earners or those expecting high tax brackets in retirement. 

Understanding investment structures and tax planning tools 

Contributions to retirement funds are tax-deductible up to 27.5% of taxable income or remuneration (capped at R350,000 annually). This reduces your tax bill at your marginal rate, and investment growth is tax-free.

For example, contributing R1,000 to a retirement annuity at a 41% tax bracket saves R410 in tax, costing you just R590 to invest R1,000. At age 55, lump sums drawn out up to R550,000 are tax-free, while amounts converted to a living or life annuity generate taxable income in retirement.

With up to 45% of retirement funds investable offshore, these offer diversification and growth, making them a cornerstone of retirement planning. 

Tax-free savings accounts deliver tax-free growth on interest, dividends or capital gains. You can invest R36,000 annually, up to a lifetime limit of R500,000. For instance, maximising the R500,000 limit and growing it to R2m yields a tax-free profit of R1.5m, ideal for expenses like travel or home repairs without increasing taxable income in retirement.

After maxing out retirement fund contributions, TFSAs are the next priority for long-term, tax-free growth. 

Annual exemptions and spousal investing 

Discretionary investments (such as unit trusts) benefit from annual exemptions: R23,800 for interest (under 65) and R40,000 for capital gains. Splitting investments between spouses doubles these exemptions, reducing overall tax liability.

For example, each spouse can hold R340,000 in cash at a 7% interest rate without exceeding the interest exemption, maintaining a tax-free cash buffer. 

Endowments tax investment returns at a flat 30% within the policy, which benefits those with marginal tax rates above 30% in retirement (for example, due to large annuities or rental income). They also simplify estate planning and provide tax-managed income, though withdrawal restrictions apply in the first five years. 

Structuring your portfolio 

Planning ahead is crucial. Consider what your portfolio and income sources will look like in retirement. For example, someone with a large retirement fund and rental properties will be likely to remain in a high tax bracket and should build up discretionary capital to draw from more tax-efficiently. 

Here’s how a high-income earner (taxed at 41%) might structure an efficient plan: 

• Maximise retirement fund contributions. Contributing R350,000 annually to a retirement annuity saves R143,500 in tax each year at a 41% rate, freeing up funds for other investments. 
• Use TFSAs. Investing R3,000 monthly at an 11% net return takes about 14 years to reach the R500,000 cap, growing to about R1.17mn. Over another 15 years at 11% this could reach R6.05m, providing tax-free discretionary capital in retirement. 
• Assess retirement income. If rental income or a large annuity will push you into a high tax bracket, split investments with your spouse to use exemptions fully and consider endowments for tax-managed income. Lump sums from endowments are taxed at 30%, saving tax if your marginal rate exceeds this. 
• Keep discretionary investments flexible. Use annual exemptions to minimise tax. For example, strategic switches in unit trusts or ETFs can trigger the R40,000 capital gains exemption, reducing long-term tax. 
• Maximise spousal allowances. Ensure both spouses fully use TFSAs and retirement fund contributions for optimal tax efficiency. 

A retirement portfolio that is truly tax-efficient will blend various tools in a way that fits your unique situation. This means using retirement funds, tax-free savings accounts, annual tax exemptions, spousal investing strategies and endowments in the right combination for your needs.

Remember that everyone’s circumstances and goals are different, and thoughtful planning must take many other aspects into account, such as your need for liquidity, the marital regime between spouses and your existing investment structures.

Whether you want to fund a child’s education, pay for major expenses or manage a high taxable income in retirement, working with a certified financial planning professional can help you build a plan that protects more of your wealth and gives you confidence for the years ahead. 

• Maré is a wealth manager at Netto Invest.