RETIREMENT ANNUITIES AND TAX PLANNING
MAKE THE MOST OF YOUR RETIREMENT ANNUITY FUND AND TAX-FREE SAVINGS ACCOUNT CONTRIBUTIONS FOR THE 2024/2025 TAX YEAR
Now is the perfect time to make sure your contributions towards your retirement annuity (RA) fund still meet your retirement goals, and to take full advantage of the current tax deduction regime.
The 2024/2025 year of assessment ends on 28 February 2025. This means you only have until the end of February 2025 to make additional (tax-deductible) contributions to your RA fund, or to make a lump sum (tax-deductible) contribution to a new RA fund if you don’t already have one.
Don’t miss out on this opportunity to maximise your tax deduction and boost your retirement savings.
WHAT IS A RETIREMENT ANNUITY FUND?
A retirement annuity fund is a type of private pension fund funded by individual policies.
RA funds offer you an opportunity to provide for a shortfall in retirement savings whilst benefiting from tax deductions at the same time. Retirement from a retirement annuity fund is allowed from age 55 onwards (with no maximum retirement age), which encourages disciplined savings. Tax is only payable on the cash lump sum elected or on the pension income received in retirement, as an investment in an RA fund does not attract tax on its growth during the investment period (before retirement).
ADVANTAGES AND FEATURES OF RETIREMENT ANNUITIES
RA funds have a number of significant benefits and features, including:
- A tax deduction (discussed below) for contributions, within certain limits.
- Contributions in excess of the allowable tax deduction are carried forward to future tax years and contributions for purposes of the allowable annual deduction. Contributions not yet allowed as a deduction at retirement may be utilised to decrease the taxable portion of the lump sum at retirement, or as an exemption against compulsory annuity income received after retirement.
- Compound growth and build-up of capital without any capital gains tax (CGT) or income tax levied before retirement.
- Prior to retirement, you will have access to the savings component once per tax year. A minimum savings withdrawal benefit of R2 000 per tax year is allowed. Such a savings withdrawal benefit will be added to your gross income and taxed as normal income and will not affect the tax liability on lump sums received from any retirement fund on retirement.
- The first R1 155 000 taxable portion of a cash lump sum taken at retirement is effectively only taxed at 12.4%, and no CGT is payable. It is important to bear in mind that these tax tables are cumulative.
- Cash lump sums on retirement are restricted. As a general rule on retirement, the full remaining value in the savings component and a maximum of one third of the vested component may be taken as a lump sum, whilst a minimum of two thirds of the vested component and the full retirement component must be used to purchase a compulsory annuity (income). There are however certain exceptions to this rule –
speak to your financial planner for more information. - No estate duty (levied at 20% on the first R30 000 000 of the dutiable estate and 25% on the dutiable amount exceeding R30 000 000) is payable on the investment value in an RA fund upon the death of a member. Where you made contributions to retirement funds that have not been allowed as a tax deduction or exemption on death, there will be an amount included in your estate as deemed property for estate duty purposes if your dependants or beneficiaries elect to receive the all or part of the benefits as a lump sum.
- Investments in retirement annuity funds are protected against creditors and insolvency in terms of the Pension Funds Act.
- A choice of investment portfolios are offered.
ALLOWABLE DEDUCTION
The allowable deduction per tax year for contributions made to retirement annuity funds is 27.5% of the greater of “remuneration” or “taxable income” (as defined in the Income Tax Act). The 27.5% deduction is limited to the amount of taxable income excluding any taxable capital gain, and further subject to an annual maximum of R350 000.
PRACTICAL EXAMPLE
Let’s say you earn an annual salary of R750 000, a bonus of R150 000, and both you and your employer are making a monthly contribution of R4 600 each to your pension fund (in addition to your contribution).
If you are currently also contributing R1 200 per month to your RA fund, your annual contributions are as follows: (R4 600 + R4 600 + R1 200) x 12 = R124 800. As your maximum allowable deduction would be R262 800, as calculated below, you could consider making a lump sum contribution before the end of the tax year to obtain the maximum allowable tax deduction for the year of assessment.
Here is an example of the tax payable with and without an additional RA contribution:
| TOTAL AMOUNT | SUBTOTAL | |
| Remuneration | R955 200 | |
| Salary | R750 000 | |
| Bonus | R150 000 | |
| Fringe benefit employer contribution to pension fund | R55 200 | |
| Less): Allowable deductions | (R955 200 x 27.5% = R262 680, but limited to the actual contribution of 124 800)* | |
| RA: own contribution (R1200 x 12) | R14 400 | |
| Pension fund: own contribution (R4 600 x 12) | R55 200 | |
| Pension fund: employer contribution | R55 200 | |
| Taxable income | R830 400 | |
| Tax payable | R223 298 (R179 147 + 39% of taxable income above R673 000, minus primary rebate of R17 235 for personsyounger than 65) | |
| TOTAL AMOUNT (IN RANDS) | SUBTOTAL | |
| *Maximum deduction: 27.5% x the higher of Remuneration or Taxable Income Remuneration and Taxable Income are the same in this example = R955 200 | R262 680 | |
| Subject to maximum of R350 000 Therefore, the total contributions can be deducted as they are less than the maximum above. | ||
| Additional allowable RA deduction | R137 880 (R262 680 maximum allowable deduction minus R124 800 that was actually contributed) | |
| TOTAL AMOUNT (IN RANDS) | SUBTOTAL | |
| Revised taxable income (R830 400 – R137 880) | R692 520 | |
| Tax payable | R169 524 (R179 147 + 39% of taxable income above R673 000, minus primary rebate of R17 235 for persons younger than 65) | |
| Tax saved due to additional RA contributions | R53 774 (R223 298 – R169 524) |
To maximise the tax saving by utilising your full retirement fund tax allowance, consider a lump sum top-up prior to the end of the 2024/2025 tax year as per the calculation above. The additional RA contribution of R137 880 will result in a tax saving of R53 774.
This example is purely for illustration purposes. Each individual’s financial plan should be based on their unique circumstances, taking into account applicable legislation at the time. Furthermore, tax savings should not be the sole reason for contributing to an RA fund, and a full needs analysis is important.
TAX AT RETIREMENT
Annuity income received after retirement is taxed as normal income at your marginal tax rate (where contributions made were not previously allowed as a tax deduction or exemption, an exemption will be applied against the compulsory annuity).
Generally speaking, a maximum of up to one-third of your vested *component and the full value of your savings component may be taken as a cash lump sum. No portion of your retirement component may be taken in cash on retirement, unless the full value of the retirement component plus two-thirds of the value of the vested component does not exceed R165 000, in which case the full retirement component and the vested component may be taken as a cash lump sum.
Lump sums accruing from a retirement fund on retirement are taxed as follows:
| TAXABLE INCOME FROM LUMP SUM BENEFITS AT RETIREMENT | |
|---|---|
| TAXABLE INCOME BRACKET | TAX RATE |
| R0 – R550 000 | 0% of taxable income |
| R550 001 – R770 000 | R0 plus 18% of taxable income > R550 000 |
| R770 001 – R1 155 000 | R39 600 plus 27% of taxable income > R770 000 |
| R1 155 001 and above | R143 550 plus 36% of taxable income > R1 155 000 |
Please note that prior lump sums taken upon withdrawal or retirement, as well as severance benefits taken or received on or after certain specified dates, have a cumulative effect on the above table, and are therefore taken into account when the tax on the lump sum is calculated.
*If you have vested rights in respect of provident fund membership before 1 March 2021, you will be entitled to receive a bigger portion of the vested component as a lump sum where there was a transfer from a provident fund or provident preservation fund to your retirement annuity fund on/after 1 March 2021.
TAX-FREE SAVINGS ACCOUNTS
Tax-free savings accounts were introduced in South Africa on 1 March 2015, to encourage South Africans to save more. They offer a very low pricing structure, and no dividends tax, income tax or capital gains tax is levied on these products. A further benefit is that you can access these funds at any time. However, these products should be viewed as long-term investments to take full advantage of their tax-free nature, bearing in mind that there are legislated contribution limits, as discussed below.
Currently, you are permitted to contribute a maximum of R36 000 per tax year, with a lifetime contribution limit of R500 000 – if you exceed either of these two limits, the excess contributions are taxed at 40%. The deadline for contributions in the 2024/2025 tax year is 28 February 2025, but bear in mind that product providers may have cut-off dates before the end of February.
The benefits can be considerable over time and a tax-free savings account can be a valuable and flexible addition to your retirement income.
Your PWM financial planner is best placed to conduct a personal lifestyle financial needs analysis to help you meet your retirement goals.
Disclaimer:
This communication is for information purposes only and does not constitute financial advice in any way or form. It is important to consult a financial planner to receive financial advice before acting on any information contained herein.
