How much can you invest in retirement funds by way of tax-deductible contributions?
The Income Tax Act changed in March 2016 to ensure fairness in tax deductible contributions to retirement funds. Historically there were differences in what people in diverse circumstances could contribute to retirement fund and with tax-deductible contributions. This is now standardised on member’s tax deductible contributions to retirement funds being 27.5% of remuneration or taxable income, whichever is greater. There is an upper limit of R350 000 per year on these tax deductible contributions.
If you contribute more than R350 000 or 27.5% of taxable income to retirement funds the excess will not enjoy tax relief in the year of contribution but the un-deducted amount can be carried over to following years or may be kept until retirement. At retirement it can either be used to increase the tax free portion of your lump sum cash withdrawal or be offset against income from annuities until the credit is exhausted. We will concentrate on the new regime and explain how you can work out exactly how much extra tax-deductible contribution you can make to retirement funds. The first step is to add up how much you and your employer are contributing to retirement funds and then how much, if any, you are contributing to retirement annuities. Add these together and you have the current situation. Let’s take someone earning say R360 000 per year. This person usually earns a bonus of 20% each year so that is another RR72 000. Their employer pays R3 000 per month for their medical aid and R2 500 per month as a pension contribution. The individual contributes R2 250 per month to a pension fund and R900 per month to a retirement annuity. Therefore existing contributions to retirement funds amount to:
Employer’s pension contribution R2 500 pm R30 000 pa
Employee’s pension contribution R2 250 pm R27 000 pa
Contribution to retirement annuity R 900 pm R10 800 pa
Totals R5 650 pm R67 800 pa
Then work out what your maximum tax deductible contribution to retirement funds can be: Calculation of new total tax free contribution allowed:
Salary R 30 000 pm R360 000 pa
Bonus R72 000 pa
Employer medical contribution R 3 000 pm R36 000 pa
Employer pension contribution R2 500 pm R30 000 pa
Total taxable income R498 000 pa
27.5% of total taxable income R136 950 pa
Current contributions R 67 800 pa
The difference, extra possible tax deductible contribution R5 762.50 pm R69 150 pa
Many people may take comfort from greater possible tax-deductible contributions to retirement funds but they may not be able to afford to contract the full contribution. But for what they can afford they have the following retirement fund options: • They may invest the extra contributions in their exiting pension fund if that fund permits extra contributions; • They may invest the extra contribution in an existing retirement annuity if extra contributions are permitted; and/or, • They may invest the extra contributions in a new retirement annuity. Some retirement funds permit any amount by way of contribution, others offer levels of extra contribution based on percentages of fund (pensionable) salary. You need to pay careful attention to these offerings and keep asking questions until you understand them fully before you commit to extra contributions.
