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Tax Benefits of a Retirement Annuity

23 Jun 2022

Several tax incentives exist to encourage South Africans to invest in Retirement Annuities (RAs).

Contributions are tax deductible

Contributions to a Retirement Annuity, pension or provident fund are tax deductible in the tax year in which the contributions are made but there are annual limitations to this deduction.

Per s11F of the Income Tax Act, taxpayers may deduct up to 27.5% of the higher of their remuneration or taxable income (before considering any donations). However, the maximum allowable deduction is R350 000 in any given year.

Not to worry though, as any disallowed contributions may be carried forward to reduce future taxable income.

How significant can this saving be?

Let’s assume an investor is faced with two investments that earn 9% per annum over the next 10 years. One investment is an RA and the other investment is a discretionary investment portfolio. The investor is taxed at 45% and wants to contribute R350 000 to the investment each year. Any tax refund the investor receives is invested at 9% at the beginning of the following year.

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The compounded benefit of the tax deduction means that an investor would earn R2 392 886.43 more investing in an RA. This can make a huge impact on an investor’s standard of living once retired.

Your investment grows tax free

There is no income or capital gains tax on the return earned in an RA.

Favorable tax rate on lump sum retirement benefits

Up to 1/3 of the value of an RA may be drawn once an investor retires. Retirement lump sum benefits are taxed on a sliding scale. The first R500 000 may be drawn tax free. The highest marginal rate on lump sums is 36% which is lower than the highest marginal rate on income which is 45%.