Question My wife and I are in our 80s and we each have a R1.8 million investment at the bank which gives us a combined monthly interest of R24,000. We use R5 000 of this to supplement my company pension each month. I have just done my provisional tax and I am horrified by the amount that I have to pay. Is there something that we can do in order to reduce this tax bill?
Answer Well done on splitting your investments between your wife and yourself. You have already added a layer of tax efficiency into your investments that many people forget to do. Remember, donations between spouses do not attract donations tax so if you have a large lump sum to invest, you can make it more tax-efficient by investing more of the money in the name of the spouse with the lower tax rate.
The appeal of fixed interest investments is that you know exactly what you are going to get. The downside is that all the growth is taxed regardless of whether you take it out and spend it or leave it to grow. This growth is added to your regular income each year so you will end up paying tax at your highest possible rate on it.
Possible solution
An alternative is to invest in an investment portfolio where you have capital growth. When you draw an income from the portfolio, the bulk of the income will be classed as a capital drawdown and not attract any tax. The portion that does attract tax what attract capital gains tax where the rate is less than half of your normal tax rate. Your choice of investment portfolio is very important. In the past I spoke about investing in three pots but now with the new retirement fund raising legislation I'm going to have to change this to the three buckets:
By doing this, you should be able to grow your wealth while paying significantly less tax you would have done had you left the money in fixed interest investment.
In order to reduce your tax bill further, you can invest up to 27.5% of your taxable income in a retirement annuity.
Insider tip
The two pot system has made investing in a retirement annuity very attractive to retired people. If you ever need access to a capital sum, you can withdraw up to one third of the RA investment. While you will pay tax on this amount, you will effectively be in a tax neutral position as you received a tax break on the contribution when you made the investment.
As many retired people made lump sum retirement withdrawals when they retired, they could be in the situation where any future lump sums will be taxed at 36%. Now they are in the situation where they can access up to one third of any new RA investments and be in a tax neutral position.
Kenny Meiring MBA CFP ® is an independent financial adviser who helps people put investment and risk structures in place to live wonderful lives. You can contact him on 082 856 0348 or at Financialwellnesscoach.co.za. Please send your questions to kenny.meiring@sfpwealth.co.za