How to get SARS to subsidise your retirement

Paying tax is a necessary obligation that ensures our government is able to deliver essential services to the people of our country. There are legitimate ways to pay less tax: investing in a retirement annuity is a prudent way to save, obtain tax relief and provide for your retirement.

Investing in a retirement annuity delivers a certain level of tax relief on your contributions. Investors will not pay any tax on the interest, dividends or capital gains that accumulate in their retirement annuity. However they pay tax on the lump sum and annuity received upon retirement.

James Coutinho, head of Group Corporate Client Tax at Liberty, says: “Up to R500 000 of the lump sum may be tax free. The rest is taxed according to a preferential tax table. While the annuity is subject to tax at the individual’s marginal tax rate, by retirement the marginal tax rate is normally lower than the tax rate while working.”

Four tax benefits of a retirement annuity

1) Reap the benefits of compound growth. When investing over the long term, investment capital will start to experience additional growth from the investment returns. The longer the investment period, the more robust the earnings will be. As this compound growth takes place within the retirement annuity fund, all the growth will be tax-free.

2) Take advantage of the protection offered by retirement annuity legislation. Many South Africans are tempted to cash in their savings before they reach retirement, but this can trigger a taxable event and erode your retirement savings significantly.

“Investors in a retirement annuity cannot access their money until retirement and neither can their creditors. This gives you the peace of mind that your retirement savings will be set aside for your long-term retirement goals,” says Coutinho.

3) Give your dependants the financial support they need. Should the investor pass away before retirement, the retirement annuity cash benefits (excluding non-deductible contributions) won’t form part of the deceased’s estate. The dependants or nominees will have access to the money.

Coutinho explains: “The trustees of the retirement annuity fund will make a determination as to who is entitled to the benefits, and only thereafter will the benefits be paid to dependents. If the death benefit is taken out as a lump sum, it will be taxable in the hands of the deceased. If the benefit is taken out as an annuity, then it will be taxable in the hands of the dependents.”

4) Deduct contributions from income tax due at the end of the year. Coutinho says it is important to note that retirement annuity contributions and any other contributions to other retirement funds will be combined to determine whether the contributions fall within the deductible limits. Investors are able to claim a deduction for their contributions up to 27.5% of the greater of compensation or taxable income, subject to a deductible cap of R350 000 per annum.


“If you provide proof of your contributions to your employer, your employer will be able to take your contributions into account every month so you will pay less tax every month. If you are self-employed you can always get some tax back at the end of the tax year,” says Coutinho.

Financial advice is essential to take advantage of tax benefits

Investors are faced with many challenging financial decisions when reaching retirement. Making the right decisions can make a significant impact on the size of their retirement nest egg. It is important to understand all the options available, especially when it comes to tax benefits.

Coutinho concludes: “Don’t leave your future to chance. Building a good relationship with SARS is the best way to ensure that you live the retirement of your dreams. Speak to a financial adviser today to find out how best to structure your retirement savings so that you can get the most value out of your money.” 

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