Retirement savings – Take a tax break!
Take-home message: Contributing to a retirement fund can help you save for retirement while also reducing the amount of tax you pay over your lifetime.
The South African government really wants South Africans to save money for retirement. The main reasons are to reduce the burden on Government to support people who may not have enough money for retirement, and because retirement savings can help the economy grow through our collective savings and investments.
Ata wants to know…
How does my retirement fund help the economy?
All the retirement money is invested in things like shares, property and infrastructure projects for a long time. These companies can then develop and expand, which will boost the economy and create jobs.
To incentivise people to contribute towards a retirement fund, the government offers three major tax benefits:
In South Africa, in 2023, if you are younger than 65 and earn more than R96 322 per year, you have to pay tax. It’s complicated, but basically 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.
Did you know?….
Mandla (35) 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.
His total tax amount = R25 965 per year
However, Mandla contributes R1 000 per month to a retirement fund.
His total retirement contribution = R12 000 per year
Mandla can deduct R12 000 from his taxable income of R144 259 = R132 259, which is the new decreased amount for which he must pay tax. Because Mandla contributes to a retirement fund, he pays R23 806,62 in tax instead of R25 965 – a saving of R2158, 38.
Mandla is a salary earner contributing to an employer-sponsored retirement fund. The tax deduction happens automatically and less tax of R179,87 (i.e. the R2158,38 divided by 12) is deducted from his salary each month.
Ata wants to know…
What happens if you don’t belong to an employer-sponsored fund but contribute towards a retirement annuity (RA)?
If you contribute to an RA, 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 don’t work for a salary are usually provisional taxpayers. They can also reduce their taxable income by the amount they’ve contributed to the RA.
Did you know?….
If Mandla’s employer did not offer a retirement fund and he contributed to an RA instead, he would have received a payment of R2158,38 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.
Ata wants to know…
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 value of the asset.
3. 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 (Click here to understand your tax situation should you be retrenched.)
- Becomes permanently disabled; or
- Retires
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.
Did you know?….
Babalwa (65) was retrenched in the early nineties. 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 R50 000, which comes to R9 000.
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.
Sources:
What are the tax advantages of contributing to a retirement fund? Available at smartaboutmoney.co.za
Tax deductible retirement fund contributions. Available at smartaboutmoney.co.za
SARS 2024 Annual Tax Deduction Tables
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