In a nutshell: Contributing to a retirement fund significantly reduces the amount of tax you pay over your lifetime.
When you start your working life, retirement seems far away, but the sooner you start contributing to a retirement fund the more money you’ll save for the future, and you’ll save on tax.
The South African government really wants South Africans to save money for retirement. The government offers three major tax benefits to incentivise people to contribute towards a retirement fund.
In South Africa, in 2023, you have to pay tax if you are younger than 65 and earn more than R96 322 per year. Tax is a compulsory contribution to the government’s income. It is one of the primary sources of revenue for government and plays a vital role in financing public services such as education, healthcare and social welfare.
The more you earn, the higher the percentage of tax you must pay. However, there are ways to pay less tax, especially if you contribute towards a retirement fund.
1 Tax deductions on contributions
Taxpayers who contribute to a retirement (or pension or provident) or annuity fund enjoy a tax deduction up to certain limits. The deduction is limited to the lower of R350 000 and 27,5% of your taxable income per year. A retirement annuity (RA) is a retirement savings vehicle for individuals who are self-employed or whose employer does not offer a retirement fund.
Mandla (28) earns R20 000 a month from his company. In February 2024, at the end of the 2023/2024 tax year, his taxable income is R144 250 (R240 000 – R95 750). The tax threshold for under 65s is R95 750, which means income below this amount is tax-free. He falls in the R1 – R237 000 category on the South African Revenue Services’ (SARS) tax table for individuals and has to pay 18% tax on the rest.
His total tax amount = R25 965 for the year
However, Mandla contributes R1 000 per month to a retirement fund.
His total retirement contribution = R12 000 per year
Thus, Mandla can deduct R12 000 from his taxable income of R144 250 = R132 250, which is the new reduced amount on which he must pay tax. Because Mandla contributes to a retirement fund, he pays R23 805 in tax instead of R25 965 – a saving of R2 160 per year.
Mandla is a salary earner contributing to an employer-sponsored retirement fund. The tax deduction happens automatically and less tax of R180 (i.e. the R2 160 divided by 12 months) is deducted from his salary each month.
Now, R180 per month might not seem like much but think about that monthly saving (that will grow year on year) over your working lifetime of approximately 40 years.
If your employer does not offer a retirement fund you can still qualify for the tax break if you contribute to a retirement annuity. You can claim the tax deduction when you file your income tax return at the end of the tax year. SARS will pay the amount into your bank account.
People who are self-employed are usually provisional taxpayers. They can also reduce their taxable income by their contribution to an RA.
If Mandla’s employer did not offer a retirement fund and he contributed to an RA instead, he would have received a payment of R2 160 from SARS after filing his income tax return.
2 Tax-free growth
In general, rental income, dividends, capital gains and the interest earned on savings accounts and fixed deposits are taxable. However, interest earned, contributions, dividends and capital gains in a retirement fund are not taxed.
Capital gain is a type of profit. It refers to making money by selling something, like an investment or a house, for more than what you paid for it – it only focuses on the increase in the value of the asset.
3 Pay less tax when you retire
Every South African who contributes towards a retirement fund may withdraw a lump sum of up to R550 000 tax-free once in their lifetime. The lump sum may only be withdrawn under certain circumstances. If the retirement fund member:
- Is retrenched or made redundant
- Becomes permanently disabled; or
However, it is best to save this tax benefit for retirement. When you retire, you may withdraw a third of your retirement savings. Up to R550 000 of that lump sum is tax-free, provided you didn’t withdraw in the above circumstances.
Taxpayers over the age of 65 enjoy further tax rebates. Once you retire you will receive a monthly income from your retirement fund or annuity. In the 2023/2024 tax year, people aged 65 to 74 start paying tax only if their monthly income exceeds R12 351, and people older than 74 only from R13 807 per month.
Babalwa (64) was retrenched in 1997 but started a new job a few months later. Before moving her retirement fund to her next employer, she withdrew R100 000. She is retiring next year and wants to withdraw R550 000 to pay off her mortgage. Of that lump sum only R450 000 will be tax-free, and she will have to pay 18% tax on the remaining R100 000, which comes to R18 000.
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