Finfocus

One of the most effective ways to save for your future while reducing your tax burden is by contributing to a retirement annuity. These investment vehicles are designed to help you prepare for retirement, offering the significant advantage of tax-free growth within the underlying portfolio.

Why Choose a Retirement Annuity?

You can contribute up to 27.5% of your taxable income (capped at R350,000 per year) to a retirement fund to get the maximum tax benefit. These contributions reduce your taxable income, effectively lowering the amount of tax you owe. Although you are capped at R350 000 per year to get the maximum tax benefit, you are allowed to contribute more than the allowable limit. Please refer to the below section for more information.

For example, if you earned a salary of R410 000 over a tax year and you contributed R70 000 to an RA, you will only be taxed on R340 000 (R410 000 remuneration – R70 000 in RA contributions).

What is a Disallowed Contribution and What Are Its Benefits?

A disallowed contribution refers to any retirement fund contribution that exceeds the allowable tax-deductible limit. While these contributions don’t qualify for a tax deduction initially, they come with significant benefits that can enhance tax efficiency both before and after retirement.

Key Benefits of Disallowed Contributions

  1. Tax Reduction on Living Annuity Income

    Under Section 11F of the Income Tax Act, disallowed contributions can be used to reduce or even eliminate the tax payable on income received from a living annuity. This allows retirees to optimize their post-retirement cash flow by lowering their overall tax liability.

  2. No Obligation to Withdraw a Lump Sum

    Thanks to Section 10C of the Income Tax Act, retirees are no longer compelled to withdraw a lump sum at retirement unless they need to. This flexibility allows individuals to make decisions that align with their financial goals and needs, without feeling pressured to access funds unnecessarily.

  3. Post-Retirement Tax Efficiency

    Contributions that didn’t previously qualify for a deduction can be used to reduce tax on:

    • Retirement lump sums
    • Post-retirement income
    • (As outlined in Paragraphs 5 and 6 of the Second Schedule.) This ensures that even non-deductible contributions can provide meaningful tax benefits over time.

  4. Estate Duty Exemption

    If any disallowed contributions remain upon the contributor’s death, these contributions will be exempt from estate duty—provided the benefit is taken as an annuity. This is governed by Section 3(3)(e) of the Estate Duty Act. This benefit can provide significant savings for beneficiaries, preserving more of the estate’s value for loved ones.

Tax-Free Savings Accounts: A Flexible Tax-Free Option

A Tax-Free Savings Account (TFSA) is another excellent tool for maximizing tax efficiency. With a TFSA, no tax is charged on gains (interest, dividends, or capital) throughout the investment period or when the investment is withdrawn.

Contribution Limits

  • Annual limit: R36,000
  • Lifetime limit: R500,000

Two Essential Tools for Financial Success

Retirement annuities and tax-free savings accounts are exceptional tax-saving products that can help you create wealth for you and your family. They’re not just optional extras—they’re essential components of a sound financial plan.

The real question isn’t whether you can afford to invest in these tax-efficient tools but whether you can afford not to.

If you’d like to learn more about these powerful opportunities, feel free to contact us today.

Please note that all contributions must be made by 25 February 2025 to be included in the current tax year.

Kindly be advised that the article above is for informational purposes only and does not constitute financial advice. For personalized guidance, please consult one of our financial advisors.