Tax Deduction on Retirement Annuity, Pension and Provident Fund contributions
Contributions made to a retirement annuity funds, pension or provident fund can be deducted from an individual’s taxable income. The deduction is capped at a rate of 27.5% of the greater of the individual’s remuneration or taxable income.
For example, in the 2020 tax year:
Pension / Retirement annuity contributions = R150 000
Taxable income = R250 000
Remuneration = R350 000
Deduction allowed = R350 000 x 27.5% = R96 250
In the example above the amount of deductions allowed will be 27.5% of the greater of taxable income or remuneration for tax purposes. Remuneration is the larger figure and is therefore used in the calculation of the deduction allowed on retirement benefits.
If the deduction allowed is less than the contributions, the difference is rolled over to the following tax year. Therefore, as per the example above:
Contributions made = R150 000
Deductions allowed = R96 250
Employee Contributions not allowed as a deduction and rolled over to the 2021 tax year = R53 750 (R150 000 – R92 250)
Important to remember:
- The contributions made by the employer and employee will qualify as a deduction.
- The employer contribution will generally reflect as a fringe benefit.
- There are additional benefits to consider for example the retirement lump fund benefit, when withdrawing a lump sum from your retirement fund. Lump sum benefits are taxed at special rates. (Call one of our registered Tax Practitioners for more information on tax free lump sum benefits and the tax treatment thereof).
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Frequently asked questions
What is Pension, Provident and Annuity Funds
A pension or provident fund is what an individual would have if in employment with an employer and the employer deducts from the salary and pays the monthly instalments over to the respective fund. An annuity fund is a fund that is entered into by an individual.
What is the difference between pension, provident and annuity funds
The main difference lies in when these funds can be withdrawn. The main difference is the following:
- Pension - Can withdraw up to a third on retirement as a lump sum.
- Provident - A member can withdraw the full amount if they wish to.
- Annuity - A member can't withdraw before the age of 55 (except if formally immigrating)
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