Contributions to a retirement fund remain an area that SARS allows as a taxable benefit or deduction against income earned. If an individual contributed to a retirement vehicle and did not receive the tax benefit during the year, the individual is within his/her rights to claim the deduction when doing their tax return.
Here’s a comprehensive article on the do’s and don’ts pertaining to retirement funds:
Retirement Fund Contributions – Remuneration vs. Taxable Income
Contributions to a Retirement Fund (Pension, RA or Provident Fund):
- 27.5% of Remuneration of Taxable Income.
- Maximum annual contribution – R 350 000.
- Arrear contributions can be made in the following tax year – subject to maximum contribution in the current tax year.
- All adhere to the 1/3 withdrawal concept on retirement etc. – subject to the tax tables which allows for the first R 500 000 to be tax-free.
- The 2/3 must be used to invest in a preservation fund for annuity income purposes. Periodic payouts are subject to the normal tax tables.
- On emigration – three-year waiting period now applies.
Retirement Fund Contributions – Remuneration vs. Taxable Income
Adjustments made for “surviving” lockdown:
- Employee reduced remuneration but retained existing retirement contr. If at the maximum of 27.5% based on higher remuneration then excessive tax benefit was received – there will be an issue on assessment.
- Fund administrators advise SARS accordingly – check that the certificate is online.
- Some funds allow for a reduced contr. but it comes at a price.
- Loans against fund value – not generally allowed.
- Review of access to a portion of the funds being considered – watch this one carefully!
Retirement Fund Contributions – DC vs. DB Funds
Defined Contribution (DC) Fund:
- If the Employer pays/contributes then Fringe Benefit(FB) tax applies.
- The contribution can be made up of multiple items:
- The actual amount invested in a retirement fund (easily determined). Only this portion can be claimed as a deduction against income for tax purposes.
- Admin fee – if this is included then the ER would need to tax this as a FB – otherwise, SARS will disallow and the EE becomes liable for the tax on assessment. Alternatively, if the EE is claiming on the tax return (i.e. has not had the tax benefit during the tax year) then the same principle would apply.
- Life & Disability cover – the payout of these is not subject to tax if / when paid out. The same principle as the Admin fee would apply.
- The combined ER and EE contributions are taken into account when determining deductibility.
Retirement Fund Contributions – DC vs. DB Funds
Defined Benefit (DB) Fund:
- If the Employer pays/contributes then FB tax applies.
- The contribution can be made up of multiple items:
- Within the fund the actual amount that’s being invested for retirement purposes is determined from time to time – is formula based as determined by the fund actuaries/administrators.
- Can depend on many factors – the fund therefore, provides % factor for calculation purposes.
- The formula is as follows: This is important to know for deductibility purposes. (Category Factor (as supplied by the Fund)) X (RFI) – (Employee Contr.) = FB
Where applicable the combined ER and EE contributions (i.e.the EE can also “top up” by contributing directly to the DB fund as well) are taken into account when determining deductibility.
Retirement Fund Contributions – DC vs. DB Funds
In summary:
- Retirement fund contributions make up a substantial portion of taxpayers’ / employees’ annual “deductions”.
- Likewise, the tax benefits are also sizeable if calculated and claimed correctly.
- Similarly, if the portion allowed for deduction purposes is not calculated correctly there could be a nasty surprise on assessment!! It’s therefore important to get this right – as a high earner it’s highly advisable to get the right advice!!