RETIREMENT ANNUITIES AND TAX PLANNING

MAKE THE MOST OF YOUR RETIREMENT ANNUITY FUND AND TAX-FREE SAVINGS ACCOUNT CONTRIBUTIONS FOR THE 2025/2026 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 2025/2026 year of assessment ends on 28 February 2026. This means you only have until the end of February 2026 to make additional recurring or lump sum contributions to your existing RA fund policy (or to a new policy if you do not already have one). These contributions are tax-deductible up to legislatively prescribed limits, and therefore assist in reducing your tax liability.

Don’t miss out on this opportunity to maximise your tax deduction and boost your retirement savings.

WHAT IS A RETIREMENT ANNUITY (RA) FUND?

A retirement annuity fund is a type of private retirement fund funded by individual policies.

RA funds offer you an opportunity to reduce possible shortfalls in retirement savings whilst benefiting from tax deductions. 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 after retirement. The investment in an RA fund does however not attract tax on its income and capital 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 are deemed to be contributions for purposes of the allowable annual tax 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 a tax exemption against qualifying annuity income received after retirement.
• Compound growth and build-up of capital without any capital gains tax (CGT) or income tax levied before retirement.
• The Two-Pot retirement system was introduced on 1 September 2024. This means that, 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 from this component. 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 over your lifetime, as discussed below.
• Access to cash lump sums on retirement is 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 an annuity (income). There are however certain exceptions to this rule – speak to your financial planner for more information.
• No estate duty 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 may 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 under 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 higher of your “remuneration” or “taxable income” (as defined in the Income Tax Act). The 27.5% deduction is limited to the amount of your taxable income excluding any taxable capital gain, and is 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 equal monthly contribution of R4 600 each to your pension fund.

If you are currently also contributing R1 200 per month to your RA fund, your annual contributions (including the contributions made by your employer) will therefore be 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:

In this example, a lump sum top-up prior to the end of the 2025/2026 tax year should be considered to maximise the tax saving 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. Tax savings should furthermore not be the sole reason for contributing to an RA fund, and a full needs analysis is required.

TAX AT RETIREMENT

Lump sums accruing from a retirement fund on retirement are taxed as follows:

Previous lump sums received on withdrawal (excluding savings withdrawal benefits received from the savings component) from any fund from 1 March 2009, and lump sums received on retirement from any fund from 1 October 2007, and severance benefits received from an employer from 1 March 2009 will be taken into account when the tax on the lump sum is calculated.

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, a tax exemption will be applied against the qualifying annuity).

TAX-FREE SAVINGS ACCOUNTS

Tax-free savings accounts were introduced in South Africa on 1 March 2015 to encourage South Africans to save more. 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 2025/2026 tax year is 28 February 2026 but bear in mind that product providers may have cut-off dates before the end of February.

The benefits of a tax-free savings account could be considerable over time and it 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.