Lieze-mari Brink, Tax & Fiduciary at Investec
Understanding the impact of overcontributions to pre-retirement funds and using Section 10C of the Income Tax Act for effective retirement and estate planning.
In South Africa, pre-retirement savings vehicles like pension funds, provident funds and retirement annuities play a crucial role in retirement planning, allowing individuals to save for their future.
To encourage South Africans to save more for retirement, Section 11F of the Income Tax Act allows you as a taxpayer to deduct your contributions to pre-retirement funds from taxable income, in this way benefiting your long-term financial planning. However, these deductions come with specific limits.
Contribution limits
The allowable deduction is capped at a percentage of your taxable income, with the maximum limit set at:
i) 27.5% of the higher of their remuneration or taxable income (including capital gains)
ii) taxable income (excluding capital gains); or
iii) R350,000 per tax year, whichever is lower.
What constitutes an overcontribution?
An overcontribution occurs when you contribute more to your pre-retirement fund than the limits set by Section 11F to qualify for a deduction from income tax. This excess is considered a “disallowed contribution” and does not qualify for tax deductions under Section 11F.
Disallowed contributions can accumulate either through regular over-contributions during the accumulation phase or by making a large lump sum payment closer to, or during, retirement.
The value of disallowed contributions is recorded on your SARS tax profile, typically displayed on the ITA34. Fund administrators provide contribution certificates confirming total contributions made for the tax year, which must be submitted during tax filing to inform SARS of these contributions.
Any over-contributions are carried forward to the following tax year, making it wise to monitor their value annually.
Utilising disallowed contributions in retirement and estate planning
Section 10C of the Income Tax Act offers a mechanism to claim a tax deduction for disallowed contributions made to pre-retirement funds when taking a lump sum from pre-retirement savings or drawing an annuity from post-retirement savings.
From an estate planning perspective, Section 3(3)(e) of the Estate Duty Act states that the value of disallowed contributions will form part of your estate for estate duty purposes.
Beneficiaries of a living annuity can choose to receive benefits as a lump sum, an annuity, or a combination of both. If the beneficiary opts for an annuity, the disallowed contribution value will be excluded from the deceased’s estate for estate duty purposes, making disallowed contributions a useful estate planning tool.
We illustrate how this works with the hypothetical example below:
Peter has a pre-retirement fund worth R15 million and accumulated disallowed contributions of R5 million. At retirement, he decides to take a lump sum of R3 million and convert the remaining funds into a living annuity.
The retirement tax on the lump sum will be calculated as follows:
Peter draws an annual income from his living annuity of R1 million.
The income tax on the lump sum will be calculated as follows:
Peter passes away.
The remaining value of his disallowed contribution is R1 million, and the value of his living annuity is R11 million. His surviving spouse has two options:
Option A:
If his spouse takes the full value of the living annuity as a lump sum:
Estate duty: The value of the disallowed contribution (R1 million) will form part of Peter’s estate for estate duty purposes.
Retirement tax on lump sum:
Option B:
If his spouse takes the full value of the living annuity as an annuity:
Estate duty: The value of the disallowed contribution (R1 million) will not form part of Peter’s estate for estate duty purposes.
Retirement tax on lump sum: N/A
Income Tax: Going forward, the spouse will pay income tax according to the marginal income tax rates on the value of the annuity drawn annually. NB: The spouse will not have access to Peter’s disallowed contribution as the disallowed contribution allocation “died” with Peter.
Benefits of disallowed contributions
From a retirement planning perspective, disallowed contributions can significantly reduce tax payable when taking a lump sum or drawing income from post-retirement savings. In estate planning, they provide:
- Tax-free growth: Investments grow tax-free within retirement funds.
- Estate duty advantages: The value of disallowed contributions is pegged, helping manage estate duty exposure.
- Cost savings: Retirement funds are not dealt with in wills, saving on executor’s fees and avoiding capital gains tax.
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Conclusion
Utilising disallowed contributions effectively can enhance retirement and estate planning strategies. It is advisable to consult with a financial adviser to assess the pros and cons specific to individual circumstances and family dynamics, ensuring that this type of planning is suitable for your needs.
ENDS
This article is published with permission from Investec’s Focus Newsletter issued on 23 May 2025.
