Putting away money for your retirement is essential for a financially-responsible future. Sometimes, however, the tax laws around retirement funds can seem very technical and complicated.
Our tax expert, Johan Swart, guides you through the current state of the law in this area.
- Previously, upon retirement, provident funds paid out the full amount in your fund, plus interest.
- All the contributions made to the fund were paid out tax-free, with only the interest on the investment, being taxable.
- However, three years ago, the Pension Funds Act and the Income Tax Act were changed.
- This was to ensure that all kinds of retirement funds work in the same way.
- The changes are also there to encourage people to save money for the future.
How will you get paid out on retirement?
- Now, when you retire, up to one third of the value of the fund will be paid out to you as a lump sum (single payment).
- Two thirds of the money will stay in your fund and be paid out as a monthly pension.
- Depending on the amount in your fund, you may or may not be taxed.
- Tax deduction are when you do not have to pay tax on money for certain purposes.
- When it comes to making payments into your retirement funds, there is now a change as to how much of this can be tax-deductible.
- This change was made to the Income Tax Act.
- Total contributions to all retirement funds of 27.5 percent of your salary, and up to a maximum of R350 000 per year, will now be allowed as a deduction against income for tax purposes.
Here is an example to better understand this process. Please note this is just a general example and the figures are therefore not exact amounts:
- If you receive R25 000 per month you will pay R4 000 in tax per month.
- The monthly tax will then only be R2 254.
- If you contribute 27% to a retirement fund, that is R 6 750 per month.
- This contribution is deducted from your income, and only after this is deducted, is the tax you owe on your salary, then calculated.
Therefore it is clear, that although making contributions towards a retirement fund costs you money in the short term; in the long term, the tax savings and growth certainly makes it worthwhile to provide for your old age.
Retirement should be a time of relaxation; make sure you make the right kind of pension plans to ensure this.
Planning for a pension but unsure exactly what steps to take? At Legal&Tax, we are your companion in understanding tax for retirement and all other stages of life.