As we approach the festive season, many professionals are eagerly anticipating their annual bonuses – a well-deserved reward for a year of hard work. While the temptation to splurge is strong, using this money wisely can reshape the course of your long-term financial future. Allocating even a portion of your bonus to strategic investments can unlock opportunities for growth and financial security.
Two smart options for South Africans looking to maximise their bonuses are retirement annuities (RAs) and tax-free savings accounts (TFSAs). These tax-efficient investment vehicles don’t just grow your wealth, they also offer distinct advantages that make your money work for you.
Now is the perfect time to start
Time is one of the most powerful tools in your investment arsenal. Thanks to the power of compound interest, even small contributions made today can yield substantial returns over time. Compounding allows your investment to grow not just from your contributions, but also from the returns generated on those contributions, creating a snowball effect.
But timing isn’t just about starting early. The end of the tax year, which falls at the end of February 2025, is a critical window to take advantage of tax benefits tied to RAs and TFSAs.
Retirement annuities: a win-win
An RA isn’t just a retirement tool - it’s a tax-saving powerhouse. Contributing to an RA allows you to deduct up to 27.5% of your taxable income annually (capped at R350 000). This reduces your taxable income, putting more money back in your pocket while growing your nest egg tax-free.
RAs are designed for long-term savings, with access restricted until you’re 55 or upon early retirement due to permanent disability. This ensures your funds remain secure for retirement. When the time comes to withdraw, only a portion is taxed, making it a cost-effective way to secure your future.
Tax-free savings accounts: growth with flexibility
TFSAs offer the perfect balance of tax efficiency and accessibility. You can contribute up to R36 000 annually and, unlike an RA, you can access your TFSA funds at any time, making them a great option for medium- to long-term goals like saving for education, a home deposit, or even as a backup emergency fund. Just remember, withdrawals permanently reduce your lifetime contribution limit of R500 000.
Another unique feature of TFSAs is the freedom to invest across asset classes, unconstrained by Regulation 28 which is issued under the Pension Fund Act, and sets limits on how retirement funds can be invested in various assets or asset classes. This allows you to align your investments with your risk appetite and financial goals.
Building a legacy, one smart choice at a time
Using your bonus to invest isn’t just about you, it’s about setting an example for your family. It’s proof that making a smart decision today can build lasting financial security. Whether it’s through the disciplined growth of an RA or the adaptable benefits of a TFSA, the choices you make now can create a legacy of sound financial planning.
The key to making the most of these options is strategy. Work with a financial adviser to determine how much of your bonus you can allocate, how to balance short-term needs with long-term goals, and which vehicle best suits your unique situation.
This festive season, give yourself more than just a short-lived reward. Invest in your future, and let your bonus be the gift that keeps on giving. You’ve worked hard for it, now let it work hard for you.
Affiliates of the PSG Financial Services Group, a licensed controlling company, are authorised financial services providers. www.psg.co.za