• Making the most of your retirement savings contribution
Articles:

Making the most of your retirement savings contribution

10 November 2017

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:

  1. no contribution is made;
  2. a 10% contribution;
  3. a 15% contribution; and
  4. 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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