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30% Return on investment – guaranteed

The number of opinions on how you should save for retirement are as many as there are people gathered around the braai. Unfortunately, many of these pieces of advice are based on hearsay or tradition, without sound financial planning principals to back them.
Today I want to show you how to make the best investment that you will most likely make in your entire life.

Consider the following example: Peter earns R 30 000 p/m and pays tax at an effective annual rate of 25%. He invests R 3 000 p/m (R 36 000 p.a) into a retirement annuity. Because of the tax deductibility of a retirement annuity, he will get 25% of the R 36 000 back from SARS (R 9 000).

The actual cash outflow of his investment being R 27 000 (R 36 000 less R 9 000). If he got a 10% market return on his investment his value will be R 39 600. Therefore, at the end of year 1 he can sit with an investment of R 39 600 which only cost him R 27 000, this being a 46% return on investment. If you know of an investment that will outperform this, please let me know.

If you are an over-achiever, you can also invest the R 9 000 tax refund, but for me there is no better vacation than one that is paid for by SARS.

Retirement annuities (RA’s) also have the following benefits:

  • You can contribute up to 27.5% of your taxable income (limited to R350,000 per year) to your RA and get a deduction from SARS for it.
  • There is no income tax, capital gains tax or dividend withholding tax on the funds in your RA.
  • The funds in your RA are protected from creditors.
  • There is no estate duty or executor fees payable on the funds in your RA when you die.

Historically retirement annuities have been very expensive investment vehicles. Therefore, you should be very careful about the type of RA you invest in.

Heinrich Coomans | CA(SA) | CFP ® is a director at Affluence Group and spesialises in Investments, Personal and Business Insurance. For any questions please contact him at or 084 586 9509.

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