Retirement planning is a long term commitment and for most of us, it entails a consistent monthly payment until you reach retirement age. Whether you are self-employed and contribute directly, or your employer is submitting payments on your behalf, these payments become part of life – or perceived as another expense at month-end – and may receive little attention from you as time goes on.
Whilst stoically saving your hard earned money for the golden years is commendable, legislation is constantly changing and your retirement contributions should be adapting to these changes. In past years, retirement funds such as provident funds, retirement annuities and pension funds all had their own set of tax deductions and limitations. As of 1 March 2016 however, all types of retirement funds are now treated the same with regards to tax and may also provide you with significant opportunities to save on tax.
Instead of having to factor in different rules if you had a mix of retirement investments, and in an effort to encourage retirement savings, the new system now allows you to save up to 27.5% of your taxable income when making retirement contributions.
How to maximise your tax saving
Many underestimate their financial requirements at retirement age and fail to save enough to live comfortably or are forced to continue working. The new system SARS has implemented has been setup in such a way that the more you save for retirement, the less tax you will pay. This means that potentially your taxable income can be reduced by over a quarter (27.5%), reducing your tax liability and resulting in a smaller tax payment. It is important to note that there is a ceiling of R350 000 that can be allocated to retirement contributions per year.
Let’s look at an example: Imagine you are earning a total taxable income of R40 000 per month (R480 000 per annum). Over the last few years you had setup a recurring payment of R2000 per month (R24 000 per annum) for your retirement fund. This means that under the new system you are only making use of a 5% deduction to your total taxable income when 27.5% is available for use. i.e. R480 000 – R24 000 = R456 000. This positions you in a tax bracket for R456 000.
With the new system, you could utilize the full 27.5% and pay as much as R11 000 per month into your retirement fund. With a monthly payment of R11 000 per month, your annual taxable income would reduce to a much lower R348 000, placing you in a lower tax bracket. This means that a good portion of money that you would be paying on tax would effectively be going into your own retirement savings, making this system a great incentive to save more for your retirement.
If you need to speak to a tax professional, call Dirmeik Consulting on:
Cape Town: 021 421 4444,
Johannesburg: 010 007 3026,
Durban: 031 007 0881