BUSINESS NEWS - South Africans are spoilt for choice when it comes to retirement savings products, however many forget to consider the tax implication of their choice.
Although government has made huge strides in harmonising the tax treatment of the different saving vehicles, there are still some tax traps for the unwary and the careless.
The 2013 FinScope survey indicated that the number of adults who do any saving at all is around 42%, with only half of those saving through formal channels.
Faeeza Khan, legal marketing specialist at Liberty Group, says the five main options in those formal channels are compulsory pension and provident fund contributions, retirement annuities, pension and provident preservation funds, tax-free savings accounts, and endowment and unit trust investment options.
Pension and provident funds
Pension and provident fund contributions are normally part of an employer and employee relationship, while retirement annuities are available to self-employed people, or those who want to supplement their existing pension or provident fund contributions.
Khan says that until last year, the tax treatment depended on the type of fund you were contributing to. Tax deductions on contributions to a pension fund were limited to 7.5% of a person’s pensionable income.
Deductions on contributions to a retirement annuity were limited to 15% of the non-retirement funding income. Contributions to provident funds received no tax deductions.
Khan says: “Effective from March 1 2016 tax deductions on contributions to retirement funds were harmonised. If one contributes to a retirement fund – whether it is a pension or provident fund or retirement annuity – one will get a tax deduction based on the greater of remuneration or taxable income.”
Khan explains that the allowable tax deduction is now capped at 27.5% of whichever is the greater (remuneration or taxable income). Contributions beyond R350 000 per annum will constitute disallowed contributions.
“The majority of individual taxpayers’ only source of income is remuneration (a salary with no additional income such as rental or dividend income). Taxable income is the amount left after all the exemptions and allowable deductions are subtracted from gross income.
“If remuneration or taxable income is not greater than around R1.2 million the 27.5% or R350 000 per annum cap will not be exceeded. Most South Africans will be well within this cap, so it is quite a generous offer to encourage people to save,” she says.
