Your decision to start saving and investing for your retirement is possibly one of the most important decisions you will ever make.

Not only are you planning ahead, but you’re also reaping major tax benefits. Start saving tax, TODAY!

What is a retirement annuity?

A retirement annuity (RA) is a personal retirement savings vehicle.

RA’s are created and sold by financial institutions that invest your contributions in order to pay you a lump sum and/or monthly income once you reach retirement.

It is not possible to withdraw funds from your RA before you reach the age of 55.

Investing in a retirement annuity further offers a number of attractive tax benefits. This means that the South African Revenue Service (“SARS”) is actually funding part of your retirement savings. 

Besides annual tax refunds, other benefits include:

  • no tax on interest, dividends or capital gains until your retirement date;
  • protection against creditors; and
  • protection against yourself (you can’t touch the money until age 55).
  •  Also, the funds housed in your RA do not form part of your estate, which means that this money will not be subject to estate duty or executor fees

Examples of how an RA provides tax relief

Let’s look at some examples of how RA contributions can affect your annual tax bill.

To keep the calculations simple and to focus solely on the tax relief offered by saving for retirement, we assume in the example that you had no other tax-deductible expenses, such as medical aid premiums, and made no donations to public benefit organisations.

We also assume that you are younger than 65. After age 65 you enjoy higher tax rebates.

Example: You earn R500 000 and contribute 15% to an RA

Using the SARS 2021/22 tax tables and current primary rebate of R15 714, we calculate that you would pay income tax of R106 725  if you do not contribute any amounts to a retirement fund.

However, your 15% contribution to an RA (0.15 x 500 000 = 75 000), for the financial year, would reduce your taxable income from R500,000 to R425,000. As a result, your tax liability is R81,850.00, not R106 725 .

This means, if you earn R500,000 during this tax year, your 15% contribution to an RA will save you R106 725 – 81 850 = R24 875 in tax.

How to calculate your retirement annuity tax relief

Although you are free to contribute as much as you want to your RA on a yearly basis, the retirement annuity tax relief is capped at a certain amount (a maximum rate of 27.5% of taxable income or remuneration, subject to a Rand cap of R350 000). Remember, this R350 000 cap (and the 27.5% limit) include the contributions you make as a member to a workplace pension or provident fund.

Should your investment exceed the cap for the year, disallowed contributions can be used in the future.

Need assistance with this calculation in order to make an informed decision? We’ve got you covered!

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.