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Time to top up your retirement annuity

As the 29^th of February and the end of the current tax year approaches, you would by now have long since filed your most recent income tax return – and may likely have filed further tax deliberations along with it until the next submission deadline looms.... However, now is exactly the time when you should consider taking full advantage of the tax deductibility of your retirement annuity (RA). By topping up your RA to the maximum tax-deductible amount before the end of this tax year, you may just be thanking the taxman when it comes to submitting next year’s tax return.

“The tax deductibility of retirement annuity contributions is very attractive,” says Nick Battersby, CEO at PPS Investments. These contributions are currently tax deductible for the greater of 15% of non-retirement funding income (income not already being used for individual or company contributions to a pension or provident fund), R3,500 less pension fund contributions or R1,750; with any excess being carried forward to the following year of assessment. “This effectively gives you the opportunity to save more towards your retirement without any additional outlay, enhancing your total retirement capital when your investment matures,” Battersby says.

Consider, for example, a self-employed investor who earns R25,000 per month. This investor’s maximum tax deductible RA contribution is R3,750 per month, or R45,000 per year. As the first R45,000 contributed to his or her RA in the current tax year is tax-free, it potentially provides for a tax rebate of R13,500 at the investor’s marginal tax rate of 30%. And, if reinvested into the RA, this additional amount will in itself be carried forward for assessment in the coming tax year.

With the current tax year winding steadily to a close, it may therefore be well worth considering making additional contributions to your RA should you recently have received a year-end bonus or 13^th cheque, or should you have some money spare from emergency savings you set aside but didn’t tap into use.

“This is especially true for higher-earning individuals with greater marginal tax rates, as Government has indicated its intention to restrict tax deductions on retirement fund contributions to a maximum nominal amount in addition to a maximum percentage amount,” says Battersby.

In its 2011 Budget Review, the South African Government indicated possible changes to the tax treatment of retirement fund contributions that included maintaining the current threshold for total tax deductions at 22.5% (7.5% of retirement funding contributed to a pension fund and 15% of non-retirement funding contributed to a retirement annuity) but further capping these deductions at R200,000 per annum. While Government explains that such adjustments will be necessary to “support expenditure on economic and social priorities” and to “contribute towards sustainable economic growth and job creation”, it does mean than investors who are currently able to claim deductions greater than this amount will be disadvantaged.

While these proposals have been set aside for further consultation, Government previously indicated that corresponding legislation would be considered “late in 2011 or in 2012”. There is therefore a good chance that these or related proposals may be implemented before the end of the 2013 tax year.

“As new legislation may be passed relatively soon, higher income earners should consider topping up their RAs in the current tax year to take advantage of the full benefits they are still able to access,” says Battersby. “However, even if tax deductions are capped in future, the fact that these deductions are available at all still offers an excellent opportunity to boost total retirement savings. Investors should therefore consult their financial intermediaries to determine how to make the most of the savings opportunity and tax advantages an RA presents.”

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