By Remay de Kock, Legal Adviser and Desiree Raghubir, Certified Financial Planner ® Professional, BDO Wealth Advisers
We find that the terms “savings” is usually associated with a negative view when discussing budgets. Clients see this as another expense in an already too long list of expenses. Other than the expenses you have to pay in order to sustain your day to day living needs, savings are needed in order to ensure sufficient means for certain and uncertain future events. Thus, we need to save money today, in order to be able to ensure our future needs will be provided for – an endless cycle. Although this is a topic that can be discussed for days on end, the focus of this article is savings for retirement – a period in life when you had to save enough in your working years in order to be able to provide for yourself in your post working life.
Questions you should be asking yourself is if you are saving for retirement, and if you are, are you utilising the maximum contribution allowed in terms of Income Tax in order to ensure “savings” on your income tax, by saving more to retirement.
From 1 March 2016, the tax deductions for retirement savings increased from 15% to 27.5%. You are now able to deduct your contributions to all retirement funds (pension funds, provident funds and retirement annuity policies) with the maximum tax deduction limited to the greater of 27.5% of taxable income or remuneration subject to an annual ceiling of R350 000. This allows one to save more for retirement and pay less tax. Excess contributions in one year may also be carried over and deducted in the next tax year.
In order to show the saving on income tax, see the comparison below of 3 individuals in the following circumstances:
- no contribution is made;
- a 10% contribution;
- a 15% contribution; and
- a 20% contribution
A earns an annual income of R1.6 million.
Contribution |
Income
|
Annual Contribution
|
Net Income
|
Tax Bracket
|
Tax Payable
|
Tax Savings
|
|
None
|
R1 600 000
|
0
|
R1 600 000
|
45%
|
R564 990
|
0
|
|
10%
|
R1 600 000
|
R160 000
|
R1 440 000
|
41%
|
R495 390
|
R69 600
|
|
15%
|
R1 600 000
|
R240 000
|
R1 360 000
|
41%
|
R462 590
|
R102 400
|
|
20%
|
R1 600 000
|
R320 000
|
R1 280 000
|
41%
|
R429 790
|
R135 200
|
B earns an annual income of R900 000
Contribution |
Income
|
Annual Contribution
|
Net Income
|
Tax Bracket
|
Tax Payable
|
Tax Savings
|
|
None
|
R900 000
|
0
|
R900 000
|
45%
|
R273 990
|
0
|
|
10%
|
R900 000
|
R90 000
|
R810 000
|
41%
|
R237 090
|
R36 900
|
|
15%
|
R900 000
|
R135 000
|
R765 000
|
41%
|
R218 640
|
R55 350
|
|
20%
|
R900 000
|
R180 000
|
R720 000
|
41%
|
R200 190
|
R73 800
|
C earns an annual income of R600 000
Contribution |
Income
|
Annual Contribution
|
Net Income
|
Tax Bracket
|
Tax Payable
|
Tax Savings
|
|
None
|
R600 000
|
0
|
R900 000
|
41%
|
R153 156
|
0
|
|
10%
|
R600 000
|
R60 000
|
R540 000
|
36%
|
R130 224
|
R22 932
|
|
15%
|
R600 000
|
R90 000
|
R510 000
|
36%
|
R124 401
|
R28 755
|
|
20%
|
R600 000
|
R120 000
|
R480 000
|
36%
|
R108 624
|
R44 532
|
It is clear from the calculations done above, that, by saving towards retirement or increasing your retirement contribution can have a substantial saving on your income tax payable.
Remember, even if you are a member of a company pension or provident fund, you can set up a retirement annuity in your name to supplement your existing contributions. By taking advantage of the new tax deduction limits, you not only save on your annual tax but also increase your retirement savings - which is ultimately your money.
Should you require advice on how to maximise your tax deduction for the 2018 tax year, which ends on the 28 February 2018, get into contact with a Financial Life Planner at BDO Wealth Advisers.
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