Retirement savings vehicles such as retirement annuities, pension funds and provident funds are great options for when you are trying to save money for when you retire.
They are all suited for long term investing and are available from most investment providers. Retirement savings vehicles (RSVs) all have one common benefit which makes them stand out – they lower your tax payable.
These investments have great built in tax benefits and are available to everyone.
What are retirement savings vehicles?
Retirement Annuities are mainly used as individual savings funds that anyone can open in their own capacity.
Generally those who are self-employed and don’t have access to group funds will open up an RA. There are also occupational funds such as, Pension and Provident funds provided by an employer to qualifying employees.
Most medium to large companies will offer Pension or Provident funds as a way of assisting their employees save for retirement.
Why invest in Retirement Savings vehicles and what tax benefits do they have?
RSV’s are structured specifically for the public to save and have enough funds for when they retire while also reaping some tax benefits.
The Government wants you to save for retirement so that your future self does not rely on the government for pension.
Thus, they implemented tax benefits into RSV’s in order to encourage people to make use of these funds and become self-reliant.
In 2016, the government introduced changes to the Income Tax Act which would include the tax benefit.
The tax benefit allows all RSV investors to claim for a tax deduction on their contributions to these funds.
The government allows you to claim back your retirement contributions up to a maximum of 27.5% of your taxable income with an annual limit of R350 000.
This means that you will essentially not pay tax on your retirement contributions as long as they don’t exceed 27.5% of your taxable income or R350 000 annually.
This is a great benefit offered by government which, I’m sure, has interested you should you not have one yet.
Let’s use a simple example to explain this benefit a bit better:
Peter is a 30 year old businessman and earns R600 000 per year.
We can assume, for this example, that this is Peter’s only income. He has no other tax deductible expenses and has made no donations.
Since Peter contributes R60 000 towards his RA, he will only be taxed on R540 000 of his annual income.
This means that according to the 21/22 tax tables he will be paying R121 881 in tax for the year.
If Peter did not contribute at all to an RA, he would be paying tax on the full R600 000 annual salary.
This means that according to the 21/22 tax tables he will be paying R143 481 in tax for the year.
As you can see contributing towards an RA saves Peter R21 600 in tax (R143 481 – R121 881). This is quite a bit of money that you could be saving as opposed to paying it over to SARS.
So, what happens to my tax before retirement?
RSV’s can essentially help you save more of your hard earned money instead of it going towards paying tax.
They’re structured to encourage you to save towards retirement so that you have enough to retire and live comfortably.
In the next article we are going to explain the tax benefits after you retire.
FAQ's
After age 55 the first R500 000 from a pension, provident or retirement annuity is taxed at 0%.
If you have previously withdrawn from any of retirement product you will have used up a portion of your ‘tax free’ lump sum.
The drawdown from a living annuity is taxed as income according to your marginal tax rate. Once your retirement funds are in a living annuity each you can chooses an income between 2.5% and 17.5% of the fund value.
All funds invested in a provident fund prior to 1 March 2021 can be withdrawn in full. This means at retirement a provident fund member could withdraw the full amount.
As of 1 March 2021 provident funds are treated the same as pension funds. At retirement you will be able to take up to 1/3 in cash and with the remaining funds you will either invest in a living annuity or you can purchase a life annuity.
