Marius Du Toit, Managing Director – Efficient Benefit Consulting
Many South Africans contribute to a company’s retirement fund or a retirement annuity to save for their retirement. However, have you asked yourself these important questions:
- Are you saving enough for retirement; and
- How can you save more by making use of tax-efficient savings vehicles?
With the end of the tax year fast approaching, the time to make the most of your tax concessions is now!
The contributions that you pay to a pension fund, a provident fund (also known as a retirement fund), or a retirement annuity are tax deductible up to a maximum of 27,5% of your taxable income. This tax concession is also limited to an overall maximum amount of R350 000 p.a. These investment vehicles are, furthermore, exempt from tax on interest and capital gains tax.
So, do you know which options are available to you?
Option 1: Make additional voluntary contributions to your employer’s retirement fund
If you are employed and you are a member of your employer’s retirement fund, you may want to make additional voluntary contributions to the fund. You will need to check the rules of the retirement fund to see if it allows for additional voluntary contributions. That being said, most retirement funds’ rules will allow this.
Not only is this tax-efficient, it is also cost-effective because retirement funds do not charge a fee for additional contributions. That means that the full amount that you contribute is allocated to your retirement savings account in the fund.
If this is the option for you, what do you need to do next? Talk to your employer, the fund’s consultant, or your financial advisor regarding this option and whether it is available to you.
Option 2: Contribute to a retirement annuity
If you do not belong to an employer’s retirement fund, or you want to contribute to additional savings outside of the fund, you can contribute to a retirement annuity. A retirement annuity is a personal tax-efficient savings vehicle for retirement.
If this is the option for you, we suggest partnering with an expert to help you choose the right option for you. For a retirement annuity, you have various options to consider in terms of the underlying investment used on the retirement annuity platform. The considerations include a range of unit trusts, personal share portfolios, and model portfolios.
Which other options could you consider?
A South African tax-free investment account should be part of your retirement savings plan. This savings vehicle allows you to save money with zero tax on investment income or growth. You can invest up to R36 000 per tax year until you reach the lifetime limit of R500 000. While it should not be your sole source of retirement savings, it is one of the best ways to boost your nest egg with a lump sum.
Key characteristics of the different investment solutions
See the table below for the key characteristics of the different investment solutions that you could consider for the retirement that you deserve:
| Pension/Provident/Retirement Fund | Retirement Annuity | Tax-Free Savings Account | Endowment | Cash/Direct Unit Trust | |
| How much can I invest? | Max of 27,5% of taxable income, limited to R350 000 p.a. | Max of 27,5% of taxable income, limited to R350 000 p.a. | Max R36 000 p.a. with a lifetime limitation of R500 000 | Any amount | Any amount |
| When can I access the funds? | When you leave the service of your employer, or when you retire from the company in terms of the rules of the fund | At retirement (minimum age of 55) | Any time (will, however, forfeit tax benefit) | Minimum five year investment term | Any time |
| What are the tax implications? | Tax-free growth during the term of the investment
Receive tax rebate on your contributions
Subject to tax upon withdrawal/income at retirement |
Tax-free growth during the term of the investment
Receive tax rebate on your contributions
Subject to tax upon withdrawal/income at retirement |
Tax-free growth during the term of the investment
Contributions above allowed threshold is taxed at 40% |
Taxed at fund level (30% tax rate)
Max capital gains tax is 12% |
Tax on interest above annual exclusion (max 45% tax)
Tax on dividends (20%)
Capital gains tax above the annual exclusion of R40 000 (max 18% tax rate) |
| What about estate duty? | Excluded from your estate upon death* | Excluded from your estate upon death | Included in estate for estate duty purposes | Included in estate for estate duty purposes | Included in estate for estate duty purposes |
Choosing the right solutions for your needs and your retirement goals can be daunting. An expert can help you to choose the appropriate retirement products and solutions, specific to your financial needs!
ENDS
