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Tax benefits from contributing to retirement funds

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Retirement funds are highly effective tax saving investment vehicles that have major benefits over the long-term. Contributions towards retirement funds reduce your overall tax liability and importantly, the growth within a retirement fund is exempt from interest, dividends, and capital gains tax.

There are no limits on how much an individual can contribute towards a retirement fund such as a retirement annuity. There are, however, limits on how much of your annual contribution will qualify as a tax deduction within a given tax year. Currently, individuals can deduct up to 27.5% of the greater of their annual taxable income or remuneration, capped at a maximum of R350,000, per tax year.

If an individual contributes an amount during a tax year that is larger than their 27.5% amount or the maximum of R350,000, the excess contribution will rollover as a qualifying tax deduction for future tax years. The benefit of a tax deduction is therefore not lost if it is not used in the specific tax year that the contribution is made. Excess contributions are the portion of your retirement fund contributions that are yet to qualify as a tax deduction.

Retirement funds such as a retirement annuity, pension fund, provident fund and preservation fund do not form part of your estate and are therefore not estate dutiable. Any amount that is yet to be claimed as a tax deduction (excess contributions) will, however, form part of your estate and be estate dutiable.

At retirement, any amount that is yet to qualify as a tax deduction can be used to increase the tax-free benefit received from your retirement fund. Additionally, it can be used to reduce your income tax liability in retirement. Your tax practitioner should record your excess contributions each tax year and ensure these are captured with SARS as part of your annual tax return. See examples below.

Example 1:

Mrs Brown has a retirement annuity valued at R3,000,000. As part of this R3,000,000 a total of R250,000 is yet to qualify as a tax deduction. Mrs Brown retires and elects to take the maximum 1/3 portion in cash, which equates to a pre-tax lump sum of R1,000,000.

In the absence of excess contributions, the retirement tax table would be applied to the value of R1,000,000. Assuming Mrs Brown had not made any previous retirement fund withdrawals, a R117,000 tax liability would be payable on the cash lump sum.

However, the excess (unclaimed) contribution of R250,000 is applied to Mrs Brown’s tax calculation. The R250,000 is first deducted from the cash portion (R1,000,000 minus R250,000) and therefore the retirement tax table will be applied to an amount of R750,000, rather than the full R1,000,000. This results in a tax liability of only R49,500, assuming no prior withdrawals had been taken by Mrs Brown.

Example 2

Mrs Brown has a retirement annuity valued at R5,400,000. 4 years ago, Mrs Brown made a R3,000,000 voluntary contribution towards her retirement annuity and there is still R2,500,000 worth of contributions that are yet to qualify as a tax deduction (hence R2,500,000 in excess / unclaimed contributions).

Mrs Brown retires and elects to take the maximum 1/3 portion in cash, which equates to R1,800,000. As per the first example above, the excess contributions are deducted first before the retirement tax table is applied. Therefore, the value of the 1/3rd cash lump sum that Mrs Brown withdraws is less than her unclaimed tax benefit and the full R1,800,000 is payable to Mrs Brown tax-free.

There will still be an amount of R700,000 that will rollover as a qualifying tax deduction in future years (R2,500,000 excess contributions less R1,800,000 cash lump sum withdrawal). The R700,000 will rollover into future years and can be used to offset the income tax payable on her retirement income, resulting in substantial income tax saving during retirement.


Contributing large amounts to a retirement fund has significant tax benefits but should not be done on the sole basis to save tax. There are several factors that need to be considered before making a large contribution towards a retirement fund, with access to liquid investments in retirement being a crucial aspect. A holistic understanding of one’s assets, circumstances and goals needs to be established to ascertain whether it is suitable for you as an investor.

Investonline has a team of qualified financial planners that can assist with conducting a financial analysis and formulating a financial plan that incorporates structuring your investments in the most tax efficient manner. Click here to speak to one of our portfolio managers.

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