If you’re lucky enough to be getting an end-of-year bonus, you could just blow it all, or you could pause and actually blow it up into an even bigger prospect says Cedrick Pila, business development manager at 10X Investments.
“You could spend your bonus on having a very festive festive season, or you could turn that little extra something into an ever-expanding gift that keeps on giving by putting it away for your retirement.”
Pila said that if you put all, or even some, of your bonus into your retirement savings, it will continue to grow over the years, plus the taxman will refund the income tax you paid on the equivalent number of rand.
This refund refers to all regular contributions you make through the year up to a total of R350,000 or 27.5% of your taxable income (if this is lower than R350,000), and includes any extra sums you might put in to your pension pot, say at end-of-year bonus time.
If, for example, you earn R500,000 a year and contribute R50,000 to your retirement fund, you’re taxed on only R450,000 of your earnings – this illustrates the principle only, though, in reality your tax calculation will probably have other deductions as well.
Pila said that the Receiver of Revenue’s tax incentives on retirement savings mean that you get a portion of the money you save for retirement back in some form.
“That could be a refund when your tax return is submitted, or as a type of ‘discount’, to continue the sales-speak, applied every month to your retirement savings contribution ie the amount deducted from your salary is less than the amount paid into your pensions savings.”
“As if this was not reason enough to ‘blow up’ your bonus, money invested in a retirement fund grows tax-free – or grows free of interest, dividends and capital gains tax – until retirement.”
“Using the above numbers, at current tax rates you would qualify for a ‘refund’ of R18,000, which is a nice and not-so-little bonus. Also, it effectively means your R50,000 contribution to your retirement pot costs you only R32,000,” said Pila.