How retirement savings could be saving you tax

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For decades retirement savings have formed the foundation of a financial plan, and for good reason – but did you know that retirement savings can not only help finance your older years, they can save you money on tax right now?

It’s a common mistake, but many people forget to declare contributions to their retirement annuity (RA) in their tax return. The SA Revenue Service (SARS) allows tax deductions for contributions to your RA, a pension fund or provident fund up to the value of 27.5% of the greater of your taxable income or remuneration.

This is a mistake – Sars is all for your retirement savings! The amount you can get back was increased dramatically by Sars in 2016 from 15 percent to 27.5 for precisely the reason that they wanted to encourage more people to save and save for retirement.

So, let’s say Judy does not earn very much and has no pension fund at work that she contributes to. Of the R100,000 taxable income she earns a year, she puts R1,000 into her RA each month. Because this is less than 27.5 percent of her annual income, she can claim back the full amount of R12,000.

However, don’t start going crazy on the RA contributions – this deduction is also limited to an annual ceiling of R350 000 per annum, even if that is less than 27.5 percent of your taxable income. If Judy were contributing R35,000 per month instead of R1,000 she would only be able to claim back for R350,000 even though she actually saved R420,000 – a whole R70,000 more than she’s able to claim.

If you’re in the position of being able to invest more than R29,000 in retirement savings contributions in any form each month, you need to be exploring different options. For example, you could leverage the benefit of a discretionary savings portfolio, which not only diversifies your money but is also far less heftily taxed when you hit retiring age and withdraw (capital gains tax as opposed to the far larger personal income tax).

These kinds of decisions are best made with a professional financial advisor, so come in and have a chat. It’s possible to save for your future and have that retirement money save you tax in the short term.