As of 1 March 2016, the government has changed the Tax Deduction Rules for contributions to retirement funds. This article will explain the benefits of reviewing your retirement plan, and how you can maximise the benefits of these tax changes.
Retirement funding in South Africa falls into three categories:
- Retirement Annuity Funds,
- Pension Funds
- Provident Funds.
In the past, deductions allowed against contributions to the three categories were calculated differently, but as of 1 March 2016 this has changed, and below I have compared the old tax method to the new, for each of the three categories.
The important thing to remember is that deductions for all three categories are now taxed in the same way.
Pre March 2016
Retirement Annuities
The greater of R1 750, or R3 500 less current contributions to a pension fund, or 15% of taxable income from non-retirement funding employment could be deducted.
Pension Funds
The greater of R1 750, or 7.5% of remuneration from retirement-funding employment.
Provident Funds
Not tax-deductible.
Post March 2016
Retirement Annuities
27.5% of the greater of remuneration or taxable income, capped at an annual limit of R350 000. This includes all contributions to retirement funding (Retirement Annuities, Pension Funds and Provident Funds).
Pension Funds
Included in the 27.5% limit above.
Provident Funds
Included in the 27.5% limit above.
When reviewing your retirement planning
The following points, in addition to the above, should be kept in mind:
- Contributions to a Pension or Provident Funds made by your employer are now taxed as a fringe benefit in the hands of the employee, and deemed to be made by the employee. This means that these contributions now form part of the above mentioned limit of 27.5%.
- By retiring late, or deferring the purchase of a compulsory annuity with the proceeds of your retirement savings, you can benefit even more from the new tax rules.
- Retirement Annuity Funds and Compulsory Annuities fall outside of one’s estate, and are thus not subject to 20% Estate duty. Retirement Annuity Funds are also protected against certain creditors (excluding an ex-spouse).
- Although this article aims to simplify the new tax rules to do with retirement funding, it is important to get professional advice from a reputable advisor, as there are many finer points not mentioned here, which need to be taken into account when planning for your retirement.
In my next article on retirement funding, I will explain the tax implications of early withdrawals of lump sums, as well as how you will be taxed on lump sums taken on retirement.
