On the 1st of March 2015, a star was born! The tax free savings account.
I am sure you are asking but how will a tax free savings bring added value to my retirement value. I will provide you with information, where I will be using basic assumptions to motivate my message, just to keep things simple.
As we know, currently, an individual can contribute R36 000 p/a or R3 000 p/m and R500 000 for a lifetime, which takes approximately 15 years, considering that full annual contributions are made.
I want to point out two simple benefits that the tax free savings brings to the retirement table:
Let us kick things off with the first one – boosting your tax free portion of your retirement income:
Now, let us get to the good part…
You can earn, up to R128 650.00 p/a out of your retirement savings, without attracting income tax. Any amount above that will be subject to tax. Many people would require more than this to survive in retirement but for illustrative purposes we will work with this amount.
By utilising your tax free savings to help boost your retirement income, we can boost that tax free income even more.
We can now tap into your tax free savings to help boost your post retirement tax free income. Based on my assumptions used, your R861 324 present value in your tax free savings could provide you with an additional R43 320 tax free income p/a which comes down to R3 610 p/m.
This means your post retirement income that can be free of tax will look like this:
Living Annuity: R128 650 p/a = R10 720.83 p/m
Tax free savings: R43 320 p/a = R3610 p/m
The total tax free income that could be generated = R14 330.83
Heading onto number 2 of the benefits of a tax free savings – The flexibility:
Listed property 25%
Offshore Assets 30%
Hedge Funds 10%
To help illustrate this, let us look at a real-world scenario of one of my actual clients:
These figures are also based on certain assumptions, my assumptions used are:
Investment return 8%
Annual increase in tax free savings income 5%