When you’re earning more than R1.5 million a year, managing your tax liability becomes critical, especially when planning for retirement. With higher income comes higher tax rates, making tax-efficient investment strategies a top priority. In this article, we’ll explore several ways to minimize your tax burden while growing your retirement savings, including Retirement Annuities (RAs), Tax-Free Savings Accounts (TFSAs), South African Endowments, Offshore Endowments, and donations to a trust for tax-efficient investing.
Marginal and Effective Tax Rates
Before diving into tax-efficient strategies, it’s essential to understand how your income is taxed. South Africa operates a progressive tax system, with different portions of your income taxed at different rates.
Marginal Tax Rate
If you earn over R1.5 million a year, your marginal tax rate falls within 41% (for income between R857,900 and R1,731,600) and 45% (for income exceeding R1,731,600).
Example of Tax Calculation for R1.5 Million Income:
Using the 2025 SARS tax tables, here’s how tax is calculated on R1.5 million of taxable income:
• First R237,100 taxed at 18% = R42,678
• Next R133,400 taxed at 26% = R34,684
• Next R142,300 taxed at 31% = R44,113
• Next R160,200 taxed at 36% = R57,672
• Next R184,900 taxed at 39% = R72,111
• Remaining R642,100 taxed at 41% = R263,261
Total tax = R514,519
Effective tax rate = (R514,519 / R1,500,000) x 100 = 34.3%
Although your marginal tax rate is 41%, your effective tax rate is 34.3%. Now let’s explore how to reduce your tax burden through smart investments.
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1. Retirement Annuity (RA): The Most Tax-Efficient Retirement Savings Vehicle
A Retirement Annuity (RA) is one of the most tax-efficient ways to save for retirement in South Africa. Contributions to an RA are tax-deductible up to 27.5% of your taxable income, with an annual cap of R350,000. This allows you to reduce your taxable income while growing your retirement savings.
Why RAs Are Tax Efficient:
Tax-Deductible Contributions: If you earn R1.5 million and contribute R350,000 to an RA, your taxable income reduces to R1,150,000, lowering your immediate tax liability.
Tax-Free Growth: Investments within an RA grow tax-free, with no taxes on interest, dividends, or capital gains.
Deferred Taxation on Withdrawals: When you retire and withdraw funds from your RA, you can take up to one-third as a lump sum (with the first R550,000 tax-free), while the remaining balance is used to purchase an annuity. Income from the annuity is taxed as you withdraw it.
Who Should Consider an RA:
High-income earners looking to reduce their taxable income while saving for retirement.
Individuals seeking long-term, tax-efficient savings with flexibility at retirement.
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2. Tax-Free Savings Account (TFSA): Maximizing Tax-Free Growth
A Tax-Free Savings Account (TFSA) allows you to invest up to R36,000 per year (with a lifetime limit of R500,000) without paying tax on interest, dividends, or capital gains. While the contribution limits are lower than for an RA, TFSAs are highly flexible and a great supplementary retirement savings tool.
Why TFSAs Are Tax Efficient:
Tax-Free Growth: The primary benefit of a TFSA is that all investment growth is tax-free. You won’t pay tax on the interest, dividends, or capital gains earned within the account.
Flexible Withdrawals: Unlike an RA, a TFSA allows for withdrawals at any time without penalties or tax implications. This makes TFSAs an excellent supplementary vehicle for retirement savings, particularly if you need liquidity.
Who Should Consider a TFSA:
High-income earners who have maximized their RA contributions and want additional tax-free investment growth.
Those seeking flexible access to their retirement savings without the restrictions of an RA.
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3. South African Endowments: Tax Efficiency for High-Income Earners
A South African Endowment is another tax-efficient option designed for individuals in higher tax brackets. Endowments are taxed at a flat rate of 30% on interest income and 12% on capital gains, making them attractive if your marginal tax rate is higher than 30%.
Why Endowments Are Tax Efficient:
Lower Tax Rate for High Earners: For those in the 41% or 45% tax brackets, endowments reduce tax liability by capping interest tax at 30% and capital gains tax at 12%.
Estate Planning Benefits: While endowments do form part of your estate, if you nominate beneficiaries on the policy, the insurer will transfer the benefit directly to them. This bypasses the executor process, allowing heirs to access their assets faster and avoids executor fees on these assets.
Five-Year Lock-In Period: Endowments have a five-year lock-in period, meaning you have limited access to your funds during this time. However, after the five years, you can make withdrawals without penalties.
Who Should Consider an Endowment:
High-income earners looking to minimize tax on interest and capital gains.
Those seeking a tax-efficient long-term savings vehicle with estate planning benefits.
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4. Offshore Endowment: Diversifying Internationally and Tax Efficiency
An Offshore Endowment allows South Africans to invest in foreign markets while enjoying tax benefits. Offshore endowments are taxed similarly to local endowments, but they provide access to global investment opportunities, helping you hedge against the local economy and the volatility of the rand.
Why Offshore Endowments Are Tax Efficient:
Tax Efficiency: Like local endowments, offshore endowments are taxed at 30% on interest and 12% on capital gains, which can be significantly lower than your marginal tax rate.
Global Diversification: Offshore endowments give you access to international markets, providing exposure to different economies, sectors, and currencies, thereby reducing reliance on the South African market.
Estate Planning: Offshore endowments are an excellent estate planning tool, as they allow for global asset diversification and can be structured to pass directly to beneficiaries, thus reducing executor fees.
Who Should Consider an Offshore Endowment:
High-income earners seeking global diversification while enjoying local tax benefits.
Individuals wanting to invest internationally for long-term growth and currency diversification.
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5. Donating to a Trust: Tax Efficiency Through Family Wealth Planning
If you’re earning over R1.5 million a year, donating to a trust can reduce your taxable income and provide tax-efficient wealth transfer. By donating R100,000 annually to a family trust (tax-free under the donations tax exemption), the trust can invest these funds, and the investment returns will be taxed in the hands of the beneficiaries, who are often in lower tax brackets.
Why Donating to a Trust Is Tax Efficient:
Annual Donation Exemption: Donations of up to R100,000 per year are tax-free (no donation tax), and by donating this amount to a trust, you can reduce your taxable income since the proceeds from this investment is not taxed in your hands.
Lower Tax Rates for Beneficiaries: Investment returns generated from trust assets are taxed in the hands of the beneficiaries, often at a lower marginal tax rate than the donor.
Wealth Transfer: By investing through the trust, the returns benefit the beneficiaries directly, providing a tax-efficient way to grow wealth for future generations.
Who Should Consider This Strategy:
High-income earners wanting to reduce their taxable income through donations.
Individuals looking to transfer wealth to beneficiaries in a tax-efficient manner, especially if the beneficiaries are taxed at lower rates.
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Conclusion
If you’re earning more than R1.5 million a year, maximizing your tax efficiency through the right investment vehicles is crucial for building long-term wealth. Here’s a recap of the most effective options:
Retirement Annuities (RAs) provide substantial tax deductions while allowing for tax-free growth, making them an essential part of retirement planning.
Tax-Free Savings Accounts (TFSAs) offer tax-free growth on smaller contributions, making them a flexible and useful complement to RAs.
South African Endowments provide tax benefits for high-income earners by reducing the tax on interest and capital gains, with estate planning benefits.
Offshore Endowments allow you to diversify globally while maintaining tax efficiency and gaining exposure to international markets.
Donating to a trust reduces your taxable income and allows investment proceeds to be taxed in the hands of beneficiaries, often at lower tax rates.
Each of these strategies has unique advantages, and combining them can create a powerful, tax-efficient investment portfolio. Consulting a professional financial planner can help tailor these strategies to your personal financial goals, ensuring you maximize your tax efficiency and grow your retirement savings effectively
Family Wealth Custodians is an authorised financial services provider - FSP 52843.
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