As stated, our minds work differently so let me try an example and see if it helps you. I am happy to do the exercise anyway as writing it down makes me think about it. Again in this example, to simplify it, we are going to ignore inflation hence we assume no salary growth and no RA contribution growth. We are dealing with a 35 year old who retires at 55. We are assuming a 10% annual growth on the investment. We will also need to assume that the current tax laws do not change (which is unlikely of course).
R50,000 - Salary pm
R5,000 - RA contribution pm
Term of investment 20 years
Pre retirement
R13,423 - Tax payable per month
R11,523 - Tax payable after deducting allowable RA contribution
R1,900 - Tax saving per month due to the RA. Either refunded when tax return submitted and reviewed or adjusted month on pay slip
R456,000 - Tax saving after 20 years of contributing (ideally you should reinvestment this "windfall" back into your RA, or at least some other investment)
Post retirement
R1,200,000 - Total amount contributed to RA at age 55
R3,619,933 - Fund value on the RA at age 55
R2,419,933 - Growth
Obviously these values for returns and growth assumes the 10% return used was an after tax and costs return. Worth reminding you again that the tax within an RA investment is more favourable than other investments. Earlier this was shown to affect the return by 1.8% on the portfolio used in the example (it could be far higher depending on the assets that make up the portfolio and how they are taxed). So the RA would return 10% per annum while another investment returned only 8.2% even if you used the same portfolio. That would make a difference of R689,434 to your lump sum after 20 years!
Something you appear to be doing in your calculations is differentiating between contributions and growth.*Not sure why you are doing this as your contributions are deductible as and when they are paid, or at least at the end of that tax year, but are not considered when taxing your lump sum and annuity income at retirement. Unless of course you have an amount that was not claimed as a deduction due to being over your maximum allowable amount in which case this is considered in calculating your tax free lump sum.
R1,206,644 - 1/3rd of retirement fund value taken as a lump sum
R335,941 - Tax payable on this lump sum (based on the 0%, 18%, 27%, 36% sliding scale referred to earlier)
The remaining 2/3rds (R2,413,288) are used to purchase an annuity from which you draw 5% per annum as an income (you are allowed drawings of between 2.5% and 17.5%). Remember that this 2/3rd amount would be invested and we can once again assume a 10% growth within the portfolio so your 5% drawing each year would be based on your fund value at the start of that year after accounting for growth. This monthly income would be taxed at standard income tax rates.
R120,664 - Income from annuity in year one (R10,055pm)
R10,280 - tax payable on annuity income in year one (R856pm)
This would be the tax payable until age 65 at which time your tax liability decreases.
R3,890 - tax payable on annuity income in year one if over the age of 65 (R324pm)
Of course you are not forced to retire at age 55 so you can delay retirement, if possible, and benefit immediately from the preferential tax rates.
Remember too that we have not factored in what you did with your 1/3rd that you took as a lump sum. That should have been reinvested somewhere too.
To project this forward would require the use of a spreadsheet, or software available to most financial planners, so not really feasible on this forum but I hope it gives you an idea. This is the sort of thing a financial planner should be doing if you ask them to that justifies them earning their keep. Of course you could do it yourself, or ask on public forums
, but they also offer advice in other fields and assist with your dealings so you don't have to speak to call centres.
R50,000 - Salary pm
R5,000 - RA contribution pm
Term of investment 20 years
Pre retirement
R13,423 - Tax payable per month
R11,523 - Tax payable after deducting allowable RA contribution
R1,900 - Tax saving per month due to the RA. Either refunded when tax return submitted and reviewed or adjusted month on pay slip
R456,000 - Tax saving after 20 years of contributing (ideally you should reinvestment this "windfall" back into your RA, or at least some other investment)
Post retirement
R1,200,000 - Total amount contributed to RA at age 55
R3,619,933 - Fund value on the RA at age 55
R2,419,933 - Growth
Obviously these values for returns and growth assumes the 10% return used was an after tax and costs return. Worth reminding you again that the tax within an RA investment is more favourable than other investments. Earlier this was shown to affect the return by 1.8% on the portfolio used in the example (it could be far higher depending on the assets that make up the portfolio and how they are taxed). So the RA would return 10% per annum while another investment returned only 8.2% even if you used the same portfolio. That would make a difference of R689,434 to your lump sum after 20 years!
Something you appear to be doing in your calculations is differentiating between contributions and growth.*Not sure why you are doing this as your contributions are deductible as and when they are paid, or at least at the end of that tax year, but are not considered when taxing your lump sum and annuity income at retirement. Unless of course you have an amount that was not claimed as a deduction due to being over your maximum allowable amount in which case this is considered in calculating your tax free lump sum.
R1,206,644 - 1/3rd of retirement fund value taken as a lump sum
R335,941 - Tax payable on this lump sum (based on the 0%, 18%, 27%, 36% sliding scale referred to earlier)
The remaining 2/3rds (R2,413,288) are used to purchase an annuity from which you draw 5% per annum as an income (you are allowed drawings of between 2.5% and 17.5%). Remember that this 2/3rd amount would be invested and we can once again assume a 10% growth within the portfolio so your 5% drawing each year would be based on your fund value at the start of that year after accounting for growth. This monthly income would be taxed at standard income tax rates.
R120,664 - Income from annuity in year one (R10,055pm)
R10,280 - tax payable on annuity income in year one (R856pm)
This would be the tax payable until age 65 at which time your tax liability decreases.
R3,890 - tax payable on annuity income in year one if over the age of 65 (R324pm)
Of course you are not forced to retire at age 55 so you can delay retirement, if possible, and benefit immediately from the preferential tax rates.
Remember too that we have not factored in what you did with your 1/3rd that you took as a lump sum. That should have been reinvested somewhere too.
To project this forward would require the use of a spreadsheet, or software available to most financial planners, so not really feasible on this forum but I hope it gives you an idea. This is the sort of thing a financial planner should be doing if you ask them to that justifies them earning their keep. Of course you could do it yourself, or ask on public forums
, but they also offer advice in other fields and assist with your dealings so you don't have to speak to call centres.
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