Regardless of your personal situation and market conditions, when planning for retirement, your approach should always be the same: to secure a stable income in retirement that will cover your essential spending and last as long you do.
The role of tax in your retirement planning is important, because if you understand the tax advantages available to you, you will be in a better position to make informed choices about how to grow your savings in the most tax efficient way possible and increase your pension pot without needing to increase your monthly contributions.
While there are many retirement savings vehicles available in South Africa, here are a few of the most popular tax-efficient options. Pension and provident funds are tax-efficient savings vehicles that are only available for employees of a company, while retirement annuities are ideal for those who are not members of company funds, for example the self-employed, to save in their personal capacity for retirement. Tax-free savings accounts were further introduced by Treasury to motivate South Africans to save in an easy, flexible and affordable way.
Comparing a Tax-Free Savings Account with a Retirement Annuity and Pension or Provident Fund
|
|
Tax-Free Savings Account/Investment |
Retirement Annuity |
Pension / Provident Fund |
|
Who can invest |
Any individual in a private capacity (parents have signing rights to child accounts) |
Any individual in a private capacity (may be bought in addition to a pension or provident fund) |
An employee through his/her employer company |
|
Tax-deductible contributions |
No tax deductions, but tax-free contributions of up to R36k per year (R500k over a lifetime) |
Up to 27.5% of income is tax deductible (max R350k per year) of total annual income |
Up to 27.5% of income is tax deductible (max R350k per year) |
|
Access |
Immediate |
Not before age 55, then only allowed to take one third as a lump sum and the remaining two third can be reinvested into an income generating product like an annuity product. Withdrawal also permissible only on early retirement due to ill-health or on emigration. |
Not while you are a member. Although you can access it if you resign, it is advisable to preserve either into a pension or provident preservation fund. |
|
Investment Diversification |
No limits set |
Subject to Regulation 28 – max 75% in shares, 30% in offshore assets and 10% Africa |
Subject to Regulation 28 – max 75% in shares, 30% in offshore assets and 10% Africa |
|
Tax on withdrawals |
Not applicable |
Taxed according to latest tax table. See Table 1. |
Taxed according to latest tax table. See Table 1. |
|
Tax on lump sum benefit |
No tax implication |
First R500k withdrawal is tax free, up to 36% on rest. See Table 2. |
First R500k withdrawal is tax free, up to 36% on rest. See Table 2. |
Source: Just SA
When it comes to choosing an appropriate tax-efficient retirement savings vehicle, it does not have to be an either-or situation. For example, members of a pension or provident fund can supplement and optimise their retirement savings’ deductible contributions by contributing to a retirement annuity if their pension fund contributions fall short of the annual limit.
Ultimately, by using the different retirement investment vehicles available, you can ensure that your retirement planning grows along with you as you move from one life stage to the next, which is an important step towards achieving a secure and comfortable retirement.
For more detailed information on appropriate retirement savings vehicles and retirement planning, click here.
If you are approaching retirement and would like to know more about post-retirement tax saving options, please click here.