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Reduce your tax liability during this retirement annuity season

Maximise your tax deductions by contributing towards retirement funds.

As we are approaching the end of the tax year, the question to ask yourself is: Have I maximised my contribution to a retirement annuity? Have I maximised the tax deduction? Well, one of the ways in which individuals can maximise their tax deductions is by contributing towards retirement funds. This is because total contributions towards retirement funds are allowed as a deduction against tax liabilities.

Don’t miss the chance of benefiting from a deduction against your tax liability!

Retirement funds contribution deduction (Section 11(F))

The total contributions an individual makes to any pension, provident or retirement annuity fund  during the year of assessment are tax deductible. However, the retirement funds contribution deduction is limited to, the lesser of:

  • R350 000;
  • 27.5% of the greater of your:
    • remuneration or
    • taxable income;
  • Taxable income before including capital gains.

Please note that the tax deduction will be capped at the actual contributions made by the individual.

Essentially, this means that individuals can reduce their tax liability by a maximum of R350 000 for the tax year. 

How can one make use of the retirement fund contribution tax deduction?

If you are currently contributing towards a pension or provident fund or your employer is contributing towards your fund on your behalf, you will have a tax deduction of the actual total contributions made towards your fund.

If you are not contributing towards a pension or provident fund via your employment, you can reduce your tax liability by starting your own retirement annuity. Thus, you would contribute towards a retirement annuity by way of a lump sum or monthly contributions. You would also have the option to add funds to the retirement annuity as and when funds are available.

Remember, if you are already contributing towards a pension or provident fund via your employment, you can still start your personal retirement annuity and make contributions towards the retirement annuity. Likewise, if you have an existing retirement annuity, you can just make a once-off contribution towards your fund. In turn, you would be maximising your tax deduction for the year of assessment.

In all the above scenarios, you would qualify for a tax deduction to the maximum of R350 000.

What are the benefits of contributing towards retirement funds?

Contributing towards retirement funds can be beneficial for several other reasons, being:

  • Compound growth: contributions are invested in selected underlying unit trust funds and the funds earn returns. Thus, contributions are invested over a long period while earning interest on the principal sum (contribution) and on the interest reinvested.
  • Building up your retirement capital: the majority of retirees are outliving their retirement savings as they had not accumulated enough capital for post-retirement funding. By maximising your annual retirement funds’ contribution, you are essentially boosting your retirement savings in turn, you get to retire comfortably without having to adjust your standard of living.
  • Protection against creditors: according to Section 37A of the Pensions Fund Act (also covering retirement annuities), retirement fund benefits cannot be reduced, transferred, or pledged to creditors for an amount exceeding R3 000. Thus, creditors can only attach up to R3 000 of your retirement funds.

In addition to the above, Section 37B of the Pensions Funds Act stipulates that pension funds do not form part of an insolvent estate.

  • Tax efficiency: upon retirement, members who transfer their full retirement benefit to a post-retirement annuity (life or living annuity) will not incur tax. This way, you get to enjoy a tax-free transfer.

Retirees who wish to take the permitted cash withdrawal portion (one-third of the benefit) at retirement, will be taxed in accordance with the retirement tax table which exempts the first R500 000. However, the R500 000 tax-free portion is a cumulative total in your lifetime. Thus, if there had been prior cash withdrawals the tax-free portion will be affected.

  • Estate planning tool: pension or provident fund benefits are not considered deemed property in a deceased estate. Therefore, estate duty is not payable on pension or provident fund benefits.
  • Leaving a legacy: on death, if you have loved ones who are financially dependent on you, the proceeds of your retirement funds will be distributed to your dependants or beneficiary nominees. You have peace of mind knowing that your loved ones are left with capital to live off.

Let’s end the 2021/2022 tax year with a tax deduction! Before February 28 2022, make sure that you use this opportunity by contributing towards your retirement annuity or starting a new retirement annuity and securing your golden days.

You are welcome to consult our experts at Global & Local Investment Advisors, who will gladly assist you and lead you towards financial freedom.

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Michael Haldane

Global & Local The Investment Experts

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