While Retirement Annuities (RAs) have their place, especially in terms of automating monthly retirement savings and providing a cash lump sum upon retirement, there is a similar, but much more exciting option available to investors who are looking for an attractive tax deduction while growing their portfolio – a Section 12J income fund.
Neill Hobbs, CEO of Section 12J company Anuva Investments Limited, says that many investors are sold on the RA option but have been overlooking a much more flexible investment option with a section 12J company.
Acknowledging that an RA is an investment specifically for retirement planning, Hobbs says: “It is astounding that many retail investors have yet to take advantage Section12J tax deduction. Although an RA and a Section 12J investment both offer a tax deduction, 12J trumps an RA on many accounts.”
When comparing an RA to a S12J income fund, these are the stand-out differences:
- An RA is limited to a maximum annual tax deduction of R350 000 compared with R2.5 million for a S12J investment. This means that some investors eliminate their tax liability completely.
- With an S12J income fund, returns can commence immediately, whilst with an RA, the investor is eligible for returns only from the age of 55.
- In recent years RA returns have generally been very pedestrian, some funds even losing capital value. In contrast, some 12J funds are achieving consistent returns of up to 10% per annum.
- Returns from a 12J fund are taxed either as dividends (20%) or as a capital gain (18%), whereas an RA is fully taxed (up to 45%) when paid out, which is generally when the retiree can least afford to pay tax.
- As with an RA, the 12J investor can choose what type of underlying asset to invest in. With Anuva Investments, for example, the investor can choose between equity, property or income funds, depending on risk appetite.
In summary, this is an overview of how an RA compares to a S12J income fund:
|Retirement Annuity||Section 12J Investment|
|Investment cap||R350 000 per annum||R2.5Million per annum R5 million per company|
|Deductible portion of taxable income||27.5%||Unlimited|
|Tax on Returns||Income Tax – up to 45%||Dividends Tax – 20%|
|Tax on withdrawal||Income Tax – up to 45%||Capital Gains Tax – 18%|
|Exit||55 years of age||5 years from date of investment|
|Investment Status||Members of an RA||Shareholding|
The recent restriction on emigration withdrawal, changes to retirement annuity rules and the threat of government’s prescribed investment policy should see smart investors looking elsewhere to invest their cash.
Section 12J provides an attractive tax break as well as the opportunity to grow and boost South Africa’s SMEE sector.
As the 12J opportunity is better understood, says Hobbs, “Many investors are withdrawing their allowed one-third of their Retirement Annuity or provident fund and re-investing into section 12J funds.
“This provides them with a refund on the obligatory tax charged on the funds withdrawn. The wonderful thing about S12J is that, instead of paying tax, the taxpayer can choose exactly where and with whom to invest this would-be tax money.”