The following traditional investment vehicles can be used to minimise the effect of tax on your retirement plans, Vernon Cresswell, a director of Fincorp, told the Truth About Retirement seminars.
* Traditional retirement annuity: Contributions are tax deductible in terms of a formula. At maturity only one third of the annuity may be taken as a lump sum. The balance must be used to buy a compulsory annuity (pension). With a conventional type of annuity, the capital is lost when you die. The balance of the lump sum is subject to taxation at your average rate when realised after the deduction of a tax-free amount.
* Pension Funds: Most employers claim a tax deduction on pension fund contributions. Employees may also claim up to 7,5 percent of their salaries as a tax deduction. Tax concessions include a tax-free portion of the third that can be paid out to you. The other two thirds buy you a pension.
A pension fund is similar to a retirement annuity, although when you retire you have to "mature" your pension fund whereas you can keep a retirement annuity going for years after your retirement.
* Life or living annuities give you more flexibility. A life annuity, like a traditional annuity, is the two thirds of a retirement annuity or pension fund that must be used to buy an annuity (pension). However, with this annuity when you die, your heirs can either receive a pension or elect to have the capital (and interest) paid to them as an escalating annuity over five years.
Life annuities can be invested in unit trusts and you can draw between five and 20 percent of the capital every year.
* Endowment policy: Contributions to an endowment are not tax deductible, but it offers a tax-free payout. Cresswell says you can be innovative with endowment policies once they have matured, but he warns against active trading in second-hand endowments. Also be wary of unrealistic premiums.
* Unit Trusts: Analysts predict this will continue to remain a popular option. Payouts are tax free.
* Provident Funds: Benefits from provident funds are subject to a complex tax structure on payment, but the advantage over a pension and retirement annuity is that the benefits from a provident fund can be paid out as a lump sum, subject to similar tax concessions as pension funds.
You can defer the maturity of your retirement annuity for two years and hence manipulate the rate of tax.