Saving for retirement is a big deal, not only for you, but also for the government, which would otherwise carry the burden of having to look after you through grants and the public sector healthcare system if you can’t afford to care for yourself. Therefore, retirement vehicles, with tax incentives, were created as a way to encourage people to save for their retirement.  

As described in the previous article about financial vehicles, the key differentiating factors to distinguish these vehicles are how and when you can get access to the funds invested in them, how tax is treated in these different products, and lastly, what underlying investments can be held in the product. These three differentiating factors will be considered here and in the articles that follow in the context of retirement products, with the first two articles focusing on the tax implications on retirement products. 

As mentioned above, there are favourable tax implications for investors when investing in retirement products. Tax benefits are enjoyed when you make contributions to the product, as well as whilst the investment is held in the product. We will also look at the tax consequences when an investor withdraws from the product.

Tax implications when contributing to a retirement product

Section 11F of the Income Tax Act allows for a deduction that South Africans can make from their “taxable income”, on which their annual income tax is calculated. This deduction from taxable income can be enjoyed when you make a contribution to a retirement product. There are no limits on how much you can contribute to a retirement product, but in terms of 11F there is a limit on the annual deduction, which is the lesser of either R350,000 or 27.5% of your taxable income during a tax year. 

As a quick reminder, let us look at what “taxable income” refers to. It is your annual gross income that is subject to income tax for that tax year. Your tax liability is the amount of tax you have to pay to SARS at the end of the tax year. 

Let us consider an example. A total of R200,000 was contributed to your pension fund during the tax year, you contributed R100,000 to your pension fund while your employer also contributed R100,000 on your behalf. (The portion that your employer contributes to your pension fund on your behalf is included as fringe benefits when calculating your taxable income, and therefore the full R200,000 can be considered for the 11F deduction.) 

Your taxable income during the tax year, including your employer’s R100,000 contribution to your pension fund, is R800,000. The lesser of 27.5% of your taxable income or R350,000 can be deducted from your taxable income for the year. 27.5% x R800,000 is R220,000 which is less than R350,000, therefore R220,000 is the annual deduction allowed that can be made from your taxable income in terms of Section 11F. The full R200,000 can thus be deducted from your taxable income. You will therefore only pay tax on (R800,000 – R200,000) R600,000. 

Let us consider what would have happened if you contributed R300,000 during the current tax year. R220,000 will be deducted from your taxable income, but the remaining R80,000 will not be deducted during this tax year and is formally known as a “disallowed contribution”. The good news however is that the R80,000 can be carried over to the next tax year and be used as a deduction in the following year. It can be carried over every year until you retire at which point it can be used as a deduction from your taxable income when you receive an annuity from your Living or Life annuity.

Tax implications in a retirement product

The benefits of investing in a retirement product are also enjoyed while the investment is held in the product, in that returns are not subject to tax. Therefore, interest earned will not be included in your taxable income and will not be taxed as income tax, realised profits will not be subject to capital gains tax and dividends received in the product will not be withheld according to the dividend withholding tax. 

Investments in retirement products are usually held for a relatively long period and it is, therefore, very important that they grow at a rate above that of inflation, otherwise you will not have enough money when you finally do retire. For this reason, the tax exemptions in the products are very beneficial and encourages people to make contributions to these products. 

It is clear that the government tries to pull out all the stops to encourage South Africans to save more for their retirement, as a way to take pressure off an already fragile public health and welfare system that would otherwise have to care for them at old age. 

Although it is encouraged to take advantage of these tax incentives, there are other considerations to make when deciding how and where you invest your rands. The next articles will give an explanation of how taxes are applied when you need to withdraw from these products and why liquidity is an important factor to consider in these products.


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