Retirement annuities: Is the tax refund worth it?

When it comes to tax, government rewards taxpayers for making choices that benefit society. Donating money to approved charitable organisations is one way to get some tax back from SARS; paying family members’ medical aid contributions is another way, says Gielie de Swardt, head of retail distribution at Sanlam Investments.

“These expenses are purely altruistic, though, and do not contribute to your own material wealth. But there is a way to build your own investment portfolio and be rewarded with a tax refund. Contributing to a retirement annuity (RA) holds the best of both worlds: build long-term wealth and reap the tax benefits,” he said.

Why would SARS reward RA investors with a tax refund?

SARS rewards you for contributing to a retirement fund now so your older self does not become dependent on the state – or society – in retirement.

Therefore, since 2016 you can contribute up to 27.5% of your total annual income to a retirement fund (the contribution is capped at R350,000) and get a tax refund. Examples of a retirement fund is a pension fund, a provident fund and an RA.

An RA has other benefits too

An RA has several benefits other than a tax refund on annual contributions: no tax on interest, dividends or capital gains while you remain invested; protection against creditors; and protection against yourself (you can’t touch the money until age 55) – to name a few, noted de Swardt.

A new-generation RA also allows you to stop your contributions at any time and take it up again at a later stage.

Sanlam Investments has created an RA infographic to show all the main tax and other rules of an RA, such as the withdrawal limits when you retire and the deferred tax, but de Swart has focused only on the aspect of an RA that he said he receives the most questions on: how does the tax relief on contributions work?

Sanlam Investments provides few examples how your RA contributions can affect your annual tax bill.

Examples of how an RA provides tax relief

To keep the calculations simple and to focus solely on the tax relief offered by saving for retirement, we assume in all our examples that you had no other tax-deductible expenses, such as medical aid premiums, and made no donations to public benefit organisations.

We also assume that you are younger than 65. After age 65 you enjoy higher tax rebates, said de Swardt.

Example 1: You earn R500 000 and contribute 15% to an RA

Using the SARS 2019/20 tax tables and current primary rebate of R14,220, we calculate that you would have paid income tax of R113,655 if you didn’t contribute any amounts to a retirement fund.

However, your 15% contribution to an RA (0.15 x 500 000 = 75 000) reduces your taxable income from R500,000 to R425,000. As a result, you need to pay income tax of only R86,655, not R113,655.

This means, if you earned R500,000 during this tax year, your 15% contribution to an RA saves you R113,655 – 86 655 = R27,000 in tax.

Is an RA worthwhile if you are already contributing to your employer’s fund?

What if you’re already contributing to your employer’s pension or provident fund? Is it worth contributing to a private RA too? If you haven’t yet maxed out your 27.5% allowance, yes, you definitely want to consider an RA too, said de Swardt.

Example 2: You earn R500 000 and contribute 10% to your employer fund and 15% to an RA

If you earned R500,000 in the 2019/20 tax year and you’re already contributing 10% to your employer’s retirement fund, adding another 15% to an RA will lead to a meaningful additional tax saving.

Again, using the SARS 2019/20 tax tables, we calculate that you would have paid income tax of R95,655 if you contributed 10% to your employer fund only.

Your additional 15% contribution to an RA (0.15 x 500 000 = 75 000) reduces your taxable income from R450,000 to R375,000. As a result, you need to pay income tax of only 71,069.50, not R95,655. This means your 15% contribution to an RA saves you an additional R95,655 – 71,069.50 = R24,585.50 in tax.


How you use your tax refund is up to you

If you earn R250,000 per year and contribute 15% of it to an RA, you get R9,750 of tax back; at a total income of R500,000 per year, this increases to R27,000; and for those earning seven digits the tax refund will be at least R61,500 for the 2019/20 tax year – if you contribute 15% of your total income to an RA.

“How you use your tax refund is entirely up to you. Settling any debt that you may still have first is always a good idea.

“Or you can use it as a deposit towards your first home or to pay for your child’s education fees. Another great use of a tax refund is to invest it in a tax-free savings account, bearing in mind that the annual limit on tax-free account contributions is R33,000 per tax year,” said de Swardt.


Read: How to get tax back if you belong to your company’s retirement savings scheme

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Retirement annuities: Is the tax refund worth it?