By Khwezi Jackson
As most people know, the more you earn the more tax you pay, says Khwezi Jackson, but fewer people know that tax incentives on retirement saving mean that the more you invest toward your old age, the more tax you save.
South Africans have a rather poor savings culture, which is part of the reason that only 6% of us are on track for a decent retirement. It’s also why the government incentivises us to be better savers by offering retirement savers a “discount” (through higher take-home pay) or “cashback” (through a tax refund) on money saved for retirement.
It is in everyone’s interest that each of us saves for our own retirement, which is why contributions to retirement savings products are tax deductible. Whatever amount you put towards a retirement annuity or a pension or provident fund comes off the annual total earnings you are taxed on. If you earn R500,000 a year and contribute R50,000 to your retirement fund, you are taxed on only R450,000. (This illustrates the principle only – in reality your tax calculation will likely have other deductions as well.)
At current tax rates, in the example above, saving R50,000 for retirement in a year would mean you would qualify for a tax deduction or refund of R18,000. This means that your R50,000 contribution to your retirement fund would cost you only R32,000. If your employer takes your contributions into account when deducting PAYE your monthly contribution of around R4,200 to your retirement fund costs you a little less than R2,700 a month. Contribute R75,000 instead of R50,000 and your tax refund increases to R27,000.
Put differently, if your tax rate is 30%, every R1,000 you save costs you only R700. Or your take-home pay would reduce by R700, but a full R1,000 has gone toward your retirement savings.
Why wouldn’t you take full advantage of the government effectively diverting some of the tax you would normally pay into your own retirement savings fund?
We all understand the concept of the more you earn, the more tax you pay. With retirement saving, the more you save, the less tax you pay.
You can claim tax relief up to a maximum of 27.5% of your earnings every year (capped at R350,000). If you contribute more than that in a tax year, it is rolled over to the next tax year. The tax year ends on February 28 so you still have a few weeks to get the maximum benefit of this year’s tax incentives.
If you are already saving for retirement, have a look at how much (or how little) of the year’s tax incentives you have taken advantage of. Consider making an additional contribution before February 28 to get closer to this year’s target (of getting as much of your tax back as you can). If you are not yet saving for retirement there is no better time than now to start. Apply for a retirement annuity online at www.10X.co.za and start 2021 using last year’s tax benefits.
Khwezi Jackson is an investment consultant at 10X
PERSONAL FINANCE