Here’s how tax deductions work when saving for retirement in South Africa
There are signs that younger generations of South Africans have been learning from the savings mistakes of their parents and are saving more prudently for the future.
Business development manager at 10X Investments’, Cedrick Pila, notes that few are aware of the tax benefits that make saving for the future even more appealing. He said that awareness and financial education are key elements to ensuring that more people understand that retirement annuity returns are tax-free, with zero tax on interest, dividends and capital growth.
Even if your retirement savings plan is totally on track, why not let the taxman give you a little helping hand, said Pila.
“It is really very simple,” said Pila, “you save for retirement and the taxman rewards you by giving you cash back.”
By way of an example, he shared the personal balance sheet of a friend, who he said would argue there was no point saving more than she already was for her retirement until Pila ‘crunched the numbers’ for her.
The friend, Thando, is 27 years old and six years into her career and, in Pila’s words, has “had a good run”. Thando has been saving for retirement from the start of her working career, as well as putting a little extra away on the side. After the loss of R20,000 in an “entrepreneurial experiment” that went sour, Thando has R50,000 left in her savings account.
“Thando toyed with a high-risk way of putting her savings to work, but after her ‘entrepreneurial experiment’ cost her R20K, she figured that not everyone is meant to be a business owner,” Pila said.
She continued to look for something that could reward her for the discipline of saving this money, he said.
Thando had read somewhere that saving money in a retirement annuity was a good idea so she asked her friend Pila to do some calculations and look at the pros and cons with her.
He told Thando that he couldn’t think of any cons, as long as she chose an index tracking fund and kept costs down. Index tracking funds are consistently shown to outperform actively managed funds, and paying low fees is key to retirement savings success.
One or two percent extra in fees might not seem like a big deal, but those costs compounded over time can make a difference of more than 50% in the value of your savings pot at the end of a 40-year working life.
The ‘pros’ list, on the other hand, looked pretty healthy, Pila said. He told Thando that all the returns in a retirement annuity are free of tax. “No tax at all on interest, dividends and capital growth.”
He also told her that the money would be protected from creditors and could not be attached to her debts if her old business came back to haunt her.
The money is safe from temptation too as it is locked away until she reaches 55.
And then the icing on the cake, said Pila, is that all contributions Thando makes to an RA are tax deductible. So putting that R50K into a retirement fund means her tax bill for the year will be reduced.
Thando currently earns R40K a month before tax ie R480,000 a year. She contributes 15% of her annual salary to her employer pension fund, that is R72 000 per annum. This reduces her taxable income to R408,000, making her liable for a tax bill of roughly R81,453 for the year before any allowances, exclusions and deductions.
- (R480,000 – R72,000) = R408,000
- [63,853 + 31% (R408,000 – R305,850)] = R95,520 – R14,067(primary rebate) = R81,453
If she adds the R50,000 from her savings account to a retirement annuity she will further reduce her tax liability. She will now have a taxable income of just R358,000, making her liable for a tax bill of roughly R65,953 for the year before any allowances, exclusions and deductions.
- R408,000 – R50,000 = R358,000
- [63,853 + 31% (R358,000 – R305,850)] = R80,020 – R14,067(primary rebate) = R65,953
“That is a whopping R15,500 further reduction in her tax bill,” said Pila. “It was a no-brainer for Thando, who now has an additional R50k growing in an RA and is looking forward to a nice tax refund.”
Contributions for the 2019 tax year must be made before February 28 to qualify for the year’s maximum allowance of R350,000 or 27.5% of your remuneration or taxable income – whichever is higher.
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