If you work for a company, chances are that you are saving a portion of your salary in a group retirement savings scheme every month, such as an umbrella fund. What you may not know is that you qualify for special tax breaks, meaning that you could have more money go to your retirement savings pot, and less to the tax man, says Allan Gray.
But you need to take advantage of these tax incentives before the end of February, which is the end of the current tax year.
Less impact on your take-home pay than you would think
Head of group savings at Allan Gray, Saleem Sonday said that the government has put tax incentives in place as a way to stimulate retirement savings by ensuring your take-home pay does not decrease directly in line with the amount of additional contributions you invest in your retirement savings.
“If you are a member of an umbrella fund, contributions are deducted from your salary before you are taxed. So, if you contribute more to your retirement savings you are taxed on a smaller amount,” Sonday said.
Every year, as a member of an umbrella fund, you are able to make a pre-tax contribution to your umbrella fund of up to 27.5% of the higher of your taxable income or remuneration, capped at R350,000 per year.
Sonday gives as an example from the table below of a person earning R25,000 per month and contributing 15% or R3,750 to an umbrella fund.
This person would take home R18,127 after an amount of R3,123 is deducted for tax. If the same person maximised umbrella fund contributions to 27.5% this would amount to an investment of R6,875 and a salary of R15,814 after R2,310 is deducted for tax.
By contributing more and taking a lesser salary, this person’s annual tax bill will be about R9,700 less and his retirement savings would receive a massive boost of an additional R37,500 for the year.
“If your total contribution to your employer’s umbrella fund for the year is not 27.5% of your remuneration, you can maximise your tax benefit by making an additional voluntary contribution to the umbrella fund before the end of February, if the fund’s rules allow for this,” Sonday said.
When is the best time to make top-up investments to your umbrella fund?
“Not everyone can afford a monthly salary reduction to take advantage of the maximum tax benefits. In this case, it is worth considering making top-up investments into the fund when you have money to spare. Speak to your payroll administrator to make this happen,” Sonday said.
If your umbrella fund’s rules don’t allow, you could consider opening a retirement annuity fund (RA). This is a retirement savings product that you own in your personal capacity.
“An RA is like a personal pension plan. It is not dependant on employment. You can usually stop and start contributions as you need to and your investment is safeguarded for your retirement,” he said.
Sonday suggests that investors who plan to make use of this tax concession invest as soon as possible to allow for the investment to process before the 28 February deadline.
“There are no disadvantages with making the most of the tax incentives now, which have been put in place to help you save. When it comes to saving for retirement, now is always the best time to contribute as much as you can afford,” he said.