YOUR MONEY: Invest or boost my bond repayment?

Question:

I have R20,000 a month that I put into a retirement annuity (RA), which helps reduce tax payable monthly. I am trying to decide whether I should rather split the R20,000 between an RA, a tax-free savings account and shares, or use the money to reduce my bond.

— A Fat Wallet Facebook community member

Answer:

It’s a tough decision as all are good options, but you do make an important point about tax. Your R20,000 RA contribution every month is tax deductible within certain limits: R350,000 a year or 27.5% of your annual income, whichever is lower.

You are currently below the R350,000 limit, but you didn’t mention what your annual income is, so you may be above the 27.5% threshold. If you are, I would reduce the RA contribution to keep it at 27.5%. I’d then use the rest to deposit into a tax-free account. The annual deposit limit is R36,000, or R3,000 a month.

As for paying off the bond, this is always attractive, but even with the prime rate at 11.75%, you should be able to get a better return within your RA (assuming it is a cheap RA with annual fees of about 1%).

Further, with the prime rate expected to drop over the next year, your bond will become cheaper and the hurdle for the RA to beat the interest rate will be lower. So, I would keep paying the RA, but I would also look to fund your tax-free account every year so you can get the benefit of the annual limit, maybe even by reducing your RA contribution by R3,000 a month. I’d let the bond run its course.

— Simon Brown, Just One Lap

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