Boost your retirement savings and pay less tax

Carrie Furman, tax specialist at Allan Gray.

Good news is always welcome, especially when it means paying less tax. Allan Gray’s Carrie Furman explains how SARS is helping you save more for your golden years.

SARS is offering generous tax deductions when you make contributions to your retirement annuity (RA), pension or provident fund. Since 1 March 2016, the tax deductions for retirement savings have been increased from 15% to 27.5%, which means you can save more for your retirement and be taxed less.

“You are now able to deduct your contributions to all retirement funds, with the maximum tax deduction you may make in a tax year limited to the greater of 27.5% of taxable income or remuneration, subject to an annual ceiling of R350 000,” explains Carrie Furman, tax specialist at Allan Gray.

If you contribute more than the limit, your excess contributions can be used to increase the value of any tax-free lump sum you take before or at retirement or to reduce the taxable portion of your living annuity income in retirement.

Furman adds that even if you are a member of company pension or provident scheme, you can set up a retirement annuity to supplement your existing contributions.

The tough part – saving more than 15%

For many South Africans, saving 15% of their income for retirement is already a tall order. To save more than that – up to 27.5% – may seem like an impossible task, especially when there are groceries to buy and school fees to be paid.

“The important thing to remember is that retirement money is still your money, even if you can’t spend it immediately,” says Furman.

She gives the example of Mr Khumalo, who earns a gross salary of R300 000 a year. If he was to stick to his 15% retirement contribution, he would pay annual tax of R37 760. If, however, he chose to boost his RA contribution to 27.5%, he’d not only be saving more for his retirement, he’d pay much less tax too – R9 750 less, as explained in the table below.

Table: How boosting your RA contribution to 27.5% means more savings, less tax

“Although contributing more to his retirement savings means that Mr Khumalo’s annual take-home pay will decrease, less of his money will be lost to tax,” asserts Furman. “Remember that your retirement contributions are still your money, whereas tax paid is effectively the government’s money.”

Here’s another way of looking at it: by giving Mr Khumalo a tax bill that is almost R10 000 lower, SARS is paying 12% of his retirement contributions for the year.

“You too could benefit from this by considering an increase to your contributions,” says Furman. “Not everyone can afford to save 27.5% of their income towards retirement, but the more you save, the better your position will be in retirement.”