Illustration: Colin Daniel

CAPE TOWN - If you earn R50 000 a month and were shown a perfectly legal way to save almost R800 000 in tax over 20 years, would you take it?

Niel Fourie, the public policy actuary at the Actuarial Society of South Africa, has a solution that can help you to achieve exactly that, while at the same time significantly boosting your retirement savings. But there’s a caveat: you have to be prepared to sacrifice a portion of your monthly take-home pay.

To illustrate this, Fourie crunched the numbers for monthly salaries of R50 000, R25 000 and R100 000.

“Obviously, the higher your pay scale, the more impressive the numbers,” says Fourie.

Take a salary of R50 000 a month. If you’re contributing 10%, or R5 000, to a retirement fund, your monthly tax is R10 683 (based on the 2018/19 tax tables). Assuming there are no other deductions, your take-home pay is R34 317.

If you doubled your monthly contribution to the retirement fund to R10 000, your tax would drop by R1 800 and your take-home package to R31 117, a reduction of R3 200. Fourie says that, effectively, the government is sponsoring the additional R1 800 towards your retirement savings, by reducing your tax rate as an incentive to save more for your retirement.

Over 12 months, your tax saving would amount to R21 600 and over 20 years to R794 568.77, assuming a 6% salary increase every year and the tax brackets adjusting accordingly.

Fourie says that, instead of sacrificing this money to taxes, you have effectively grown your retirement savings by at least this amount or more, depending on where you invested your money.

Here is how much you can save if you earn R25 000 or R100 000 a month:

• If you are contributing 10%, or R2 500, of your salary of R25 000 every month to a retirement fund, your monthly tax is R3 372 and your take home-pay is R19 128, Fourie says.

If you doubled your monthly contribution to the retirement fund to R5 000, your tax would drop by R650 and your take-home package to R17 278, a reduction of R1 850, Fourie says. In this case, the government is sponsoring an additional R650 towards your retirement savings.

Over 12 months, your tax saving would amount to R7 800 and over 20 years to R286 927.61, Fourie says.

• If you are contributing 10%, or R10 000, of R100 000 to a retirement fund, your monthly tax is R28 814. Assuming there are no other deductions, your take-home pay is R61 186.

If you doubled your monthly contribution to a retirement fund to R20 000, your tax would drop by R4 100 to R24 714 and your take-home package to R55 286, a reduction of R5 900. In this case, Fourie says, the government is sponsoring R4 100 towards your retirement savings. This tax saving would amount to R49 200 in the first 12 months and to R1.8 million over 20 years.

Fourie says that, by giving up a portion of your take-home pay, you end up with significant tax savings, which, if invested wisely, could grow into a sizeable nest egg.

“Even though you will be taxed when you start drawing an income in retirement, it will most likely be at a lower marginal rate. It is also clear that, the more you earn, the more compelling the argument to save in a pension fund or a retirement annuity,” he says.

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