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Pension fund or RA?

Reader’s question answered.

Q: I am a 54-year-old male member of the Transnet Pension Fund. I recently responded positively to my employer’s advice for increasing monthly premiums. I have realised that Sars does not consider pension fund contributions for tax relief when submitting yearly returns. I am therefore thinking of reversing my decision, rather increase my Retirement Annuity, which I have with a financial institution, for tax returns purposes.
 
Please advise if it is a right decision.

A: As of March 1 last year, irrespective of whether you have a pension, provident or retirement annuity (RA), you will qualify for a tax deduction of up to 27.5% of your taxable income (subject to a maximum of R350 000 per year). This limit applies to the total contributions you make to all retirement funds in the tax year.

Prior to March 1 2016, members could get a deduction of up to 7.5% on their own contributions, and no deduction on their employer contribution. Post 1 March 2016, you will now pay fringe benefit tax on the employer contribution, but at the same time get a deduction on both your own and your employer’s contribution by way of a reduction in taxable income, subject to the limits referred to above. This will leave you in the same position as before March 1 2016, as long as your contribution is below the limits mentioned above. By increasing your contribution to the employer pension fund, you get the benefit of the effective tax deduction monthly and you won’t have to wait until you file your tax return (as is the case if you contribute to your own RA).

I would advise you to speak to someone in your HR/payroll department as you should be receiving the full tax deduction for the total contributions if they are below the limits mentioned above. Any contributions in excess of these limits will be carried into the next tax year.  

Peter Nurcombe-Thorne is a director of the Rosebank Wealth Group

 

If you have a question that you’d like to submit to one of the advisors listed on Moneyweb’s Click-an-Advisor section, please contact eleanor@moneyweb.co.za

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Peter Nurcombe-Thorne

Rosebank Wealth Group (Pty) Ltd

COMMENTS   7

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You get an immediate tax benefit every month on your payslip due to the pension fund contributions.

If it went into a RA, you’d have to wait about at least 15 months to see the tax benefit of your previous years March month contribution in the form of a SARS tax refund, the period lessening until this years Feb contribution you’d see the return on in 3 months.

If you are contributing 15% or such to the pension fund, rather consider putting more into a RA (you’ll a tax refund from SARS come filing time) or increasing your pension fund contributions if possible (if you put in R1000 extra into your pension fund and you are in the 41% tax bracket, you’d only be about R600 out of pocket come pay day, due to the tax benefit you’ll receive immediately on the extra contributions).

You can have your monthly RA contribution deducted from your payslip at most places. No need to wait 15 months.

I doubt from most employers. But if people are doing that they must let us know so we know how widespread it is.

agreed – there are employers that are willing to do it and will let you deduct RA against payslip rather than wait 15 months.

I am following up with my employers HR, will be interesting to find out.

Costs in the Pension Fund should be cheaper than the RA.
However, do you have a say in the allocation of Funds? – that may sway you to go with the RA.

My tuppence worth.

With a decent pension fund this is way better than an RA. Often the company picks up admin costs and you generally have the benefit of a wide range of fund managers and a pension fund committee.

Obviously this does situation does not apply to all pension funds.

Given Transnet’s woeful history and its AA/BBB-EEE connections an RA may be the best way to go though.

Good luck, as a guvmint employee you have my sympathy.

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