The start of a new calendar year is closely followed by the ending of a tax year and with this comes the anxiety and uncertainty of trying to determine whether your tax affairs are in order or how you can optimize your upcoming return. One of the tools in your armoury is the use of retirement savings vehicles and retirement contributions to deduct against your taxable income, thereby effectively reducing your tax liability for the relevant tax year.

Chris Nel

Chris Nel
Financial Advisor and Admitted Attorney

Each year individual taxpayers can claim a deduction on all their combined annual contributions to retirement funds up to 27.5% of the greater of their ‘remuneration’ or ‘taxable income’, subject to an annual monetary cap of R350 000. There are two ways that these contributions can be made.

1. Pension or Provident Fund Members

By virtue of your employment, you may already be a member of your employer’s pension or provident fund. These contributions are normally allocated in the form of a percentage of your gross income. Although this is restricted to those lucky enough to have access to a retirement fund through their employer, there is another option which is available to all.

2. Retirement Annuity

A Retirement Annuity or RA, is an alternative retirement savings vehicle that anyone can invest in. This is ideal for those of us who do not have the benefit of an employer pension/provident fund or for those who want to increase their current employee contributions to max out their deductions. It gives you all the tax benefits of a pension provident fund in your personal capacity.

Let’s look at an example of both vehicles in practice and how they can be used to optimise your tax:

  • Meet John. John earns an annual salary of R500 000 and as a member of his employer’s pension fund he contributes 10% of this annual salary towards his retirement savings (R50 000 annually).Assuming John has no other deductions, this R50 000 retirement contribution reduces his total taxable income to R450 000, leaving him with an income tax bill of R 89,600.00 (per the 2021/2022 SARS tax tables).

  • Now, if John would like to optimise his tax deduction, he can max out his annual allowable retirement contribution to 27.5% – i.e. contribute a further R87 500 towards a Retirement Annuity.This brings his total retirement contributions to R137 500 and will reduce his taxable income to R362 500, leaving him with an income tax bill of R 62,475.00. This amounts to a total tax saving of R27 125 (a 30% reduction in tax).

In essence, by saving for retirement you are utilising the only allowable tax deduction where you retain ownership of the funds used to offset your tax. By merely diverting some of your income towards saving for retirement, you are reducing your annual tax liability.

Retirement savings should be considered in line with a holistic financial plan. It is of the utmost importance that you receive the correct financial advice when planning your retirement savings and how best to invest it. You should always consult with a financial planning professional who can advise you on the best solution to match your retirement and financial needs.

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