Tips to minimise your tax with long-term savings

The most important thing to remember:

The longer you save, the greater the tax benefit.

Although every person’s situation is different and there is not a “one size fits all” answer to setting up your retirement savings in the most tax-effective way, there are a few general tips which we set out in this topic.

From a tax perspective, the main difference between tax free investments and retirement funds is that the money you invest in a tax free savings account comes from your income after tax has been deducted from it and thereafter you do not pay any more tax on the investment. On the other hand, the money you invest in a retirement annuity is deducted from your income, resulting in a lower taxable income now but you still have to pay tax when you access your funds from a retirement fund at a later stage.

This means that the higher your current marginal tax rate, the more beneficial it is to invest in a retirement fund, as then you are making a greater tax saving by reducing your taxable income.

For this reason, as a general rule, it is a good idea to first save using a tax-free savings account while you are still paying a lower marginal tax rate and later in life, when you are earning more (and therefore paying tax at a higher rate) you can then limit your taxable income by contributing more to retirement annuities.

Rule of thumb:

First place all your savings in a tax-free investment, until you reach your life-time limit, then invest in a retirement annuity.