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A quick guide: How to make the most of tax allowances on your retirement savings each year

25 January 2024 Robyn Laubscher, Advice and Product Specialist at PSG Wealth
Robyn Laubscher

Robyn Laubscher

Securing a comfortable retirement remains one of the biggest challenges faced by South African investors. Retirement annuities (RAs), pension funds, provident funds and tax-free savings accounts (TFSAs) are some of the financial instruments available to help individuals save tax-efficiently for this goal.

To maximise the tax benefits of savings towards retirement in South Africa, it’s essential to understand the limits that come with each of these products and how these may affect your taxable income.

In South Africa, the limits placed on retirement savings and which transactions are allowed, are governed by legislation. There is no legislative limit on how much South Africans can contribute towards their retirement savings on an annual basis. Tax relief, however, is set at a maximum rate of 27.5% of taxable income, subject to a cap of R350 000 per year.

This means that individuals who make regular monetary contributions to their retirement savings, can benefit greatly from tax relief, because these contributions reduce their taxable income.

Here, ‘taxable income’ includes income or remuneration, as well as capital gains from investments. To calculate what your taxable income is, you will need to account for income such as your salary, bonuses, commission earned, rental income, interest income earned and foreign dividends.

By way of an example, if an individual earns R650 000 a year as taxable income, the maximum tax-deductible contribution they can make towards their retirement savings fund would be R178 750 (27.5%). Therefore, at the end of the tax year, given that the individual made the maximum contribution, their tax liability would be calculated on R471 250 (R650 000 – 27.5%).

Depending on the rate of tax that applies to each person’s relevant tax bracket, reducing taxable income by 27.5% could make a significant difference in terms of tax savings on a yearly basis as well as in the long run. For this reason, advisers often encourage their client to make the maximum contribution each year to their retirement funds in order to realise the full potential of tax relief on retirement savings.

RAs and TFSAs are great investment vehicles to supplement retirement savings, as they allow for additional flexibility and diversification, however, you need to find the right balance between the two. A qualified financial advisor can help you plan the nuances of your income and will help you avoid the pitfalls of simply relying on the rules of thumb when it comes to financial planning.

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