Tax Tips

WHAT ARE THE TAX BENEFITS OF A RETIREMENT ANNUITY?

1

Contribution are tax-deductible

In short, you pay less tax.

Money that you put into a retirement annuity is deducted from your taxable income. So, for example, if you earn R 700 000.00 a year, and you contribute R 70 000.00 to a Retirement Annuity during the year, you are only taxed on R 630 000.00 of your income.

There are limits. A  maximum of 27,5% of your remuneration or taxable income (whichever is higher) and no more than R 350 000.00, is tax deductible in a tax year. You can contribute more to your Retirement Annuity but after you have reached these limits,  your contributions are rolled forward to and automatically deducted in the future years. Also, the limit applies to all your retirement savings combined (including retirement annuities, pension funds and provident funds) So, if you contribute  the maximum of R 350 000 in total, and R 150 000 went to a pension fund at work, only R 200 000.00 of the Retirement Annuity contributions will be deducible

2

Returns of your Retirement Annuity are Tax-Free

You don’t pay tax on Retirement Annuity Investment returns, such as interest, income, dividends and capital gains tax

3

You can take a tax-free lumpsum when you retire

When you retire you can take up to a maximum of a third of your Retirement Annuity as  a lump sum (or all of the funds if the total value is less than 247 500.00)

The first R 500 000.00 that you take is not taxed. Anything that you take more than the R 500 000.00 will be tax according to an incremental sliding scale

When you retire you can take up to a maximum of a third of your Retirement Annuity as  a lump sum (or all of the funds if the total value is less than 247 500.00)

The first R 500 000.00 that you take is not taxed. Anything that you take more than the R 500 000.00 will be tax according to an incremental sliding scale

HOW TO MAXIMISE THE TAX BENEFIT OR YOUR RETIREMENT ANNUITY:

1

Contribute as much as you can:

The more you save, the less tax you pay.

Here’s an example:

Let’s say you earn R 500 000 a year. If you contribyred 10% of that (R 50 000) to your Retirement Annuit, the at the current income tax rates, you would qualify for a refund of R 18 000. That’s pretty decent bonus. And, effectively, your R 50 000 contribution only costs you R 32 000.00

If you contribute R 75 000, instead of R 50 000 ( 15% instead of 10%) your tax refund increase to R 27 000.00your

2

Reinvest your refund

What if you putt the R 18 000 refund (from the example above) back into your Retirement Annuity the next tax year? Add that to the R 50 000 that you’ll probably continue contributing and you’ve suddenly contribute R 68 000. Now your tax refund is going to be R 24 480. Reinvest that the following year and your refund will be R 26 813.

At the same time, you’re contributing more to your Retirement Annuity. Those extra savings will grow and compound over time, massively boosting your income when you retire.

3

Add what you can by the end of the tax year

The tax year ends on 28 February. If you have a lump sum of money available to top up your Retirement Annuity before then, you can increase your tax benefits for that year. Some people are able to make several lump-sum contributions in the months leading up to the end of the tax year.

Others choose to increase their monthly contributions, ideally through a debit order. That way the contributions is automatic, and they aren’t tempted to spend the money. People also say they find it easier to live on what’s left after they’ve saved, rather than save what’s left after they’ve lived (which is usually nothing)

YOUR RETIREMENT ANNUITY AND TAX SEASON

1

What documents you need when submitting a tax return:

You need an income tax certificate, which is issued by your Retirement Annuity service provider. The certificate indicates how much you contributed to the retirement annuity during the year. You include that amount on the tax return and SARS calculated how much of your contributions it will allow as a tax deduction for that year.

2

How to get your tax certificate:

Your provider my email it to you but most provider make your tax certificate available online.

3

How to calculate the tax refund for your Retirement Annuity

Multiply the amount you’ve contributed during the year by your marginal tax rate (the highest rate applied to any part of your income).

So, if you have contributed R 10 000 during the year and your marginal tax rate is 25% you will get a refund of R 2 500.00

Please note that your refund my not mean an actual payment back from SARS. If your employer takes your Retirement Annuity contributions into account when deducting PAYE, you actually get the refund back monthly in the form of higher take-home pay.

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