Retirement funds win on the tax front

Wealth

Retirement funds win on the tax front

Retirement funds – including retirement annuities (RAs) and occupational pension and provident funds offer the greatest tax benefits.

Retirement funds – including retirement annuities (RAs) and occupational pension and provident funds (either directly from your employer or in an umbrella fund) – offer the greatest tax benefits and the government provides various incentives to encourage us to use these retirement savings products:

You pay tax on benefits at a favourable rate

      

   Lump sum benefits are taxed on a sliding scale with a portion of the benefit tax free. Income benefits, such as annuities and pensions, are taxed at your marginal tax rate.

You do not pay Capital
Gains Tax


     You do not pay Capital Gains Tax, dividends withholding tax or income tax on the investment growth earned in a retirement fund. Because you are compounding all growth tax free, your investment value at the end of 30 years could end up far higher than in a discretionary unit trust investment.

You can deduct up to 27.5% of higher taxable income


     As well as remuneration, capped at R350 000 per year. This doesn't mean that you cannot invest more than the allowable tax deduction.

If you contribute more than you can deduct in a year, you can carry over the amount and deduct it in a year when you contribute less than the maximum contribution. Alternatively, you can increase the tax-free amount of a cash lump sum on withdrawal/retirement or you can offset the amount against the taxable portion of your annuity income. All contributions to a retirement fund are therefore tax deductible; it is just a question of when the deduction will apply. Employer contributions to occupational pension and provident funds are included in your gross income as a fringe benefit. This means that you can treat your employer’s contributions as your own when calculating your tax deductions.


    Rossouw, C. (2019). How to earn higher investment returns and pay less tax this tax year (2018/19). Cape Town: Allan Gray, pp.4