The more traditional route to retirement is working until 65 and then living off our Retirement Annuities or Pension Funds until we die at age 90 with R0 left in our retirement account. Life has changed quite a lot over the years though and in South Africa, only around 5% of retirees can successfully live off their retirement savings without having to work again (this is at 75% of their salaried income).
Investing in traditional retirement products can work well as we are in part subsidized by the Government and SARS. To explain how this works in a little more detail, we first need to understand how we are taxed. In South Africa for the 2021/2022 Tax Year, the following tax rates apply:
|TAXABLE INCOME||RATES OF TAX|
|R1 – R216 200||18% of taxable income|
|R216 201 – R337 800||R38 916 +26% of the amount above R216 200|
|R337 801 – R467 500||R70 532 + 31% of the amount above R337 800|
|R467 501 – R613 600||R110 739 + 36% of the amount above R467 500|
|R613 601 – R782 200||R163 335 + 39% of the amount above R613 600|
|R782 201 – R1 656 600||R229 089 +41% of the amount above R782 200|
|R1 656 601 and above||R587 593 +45% of the amount above R1 656 600|
In South Africa, there is also a tax threshold where individuals under the age of 65 do not pay tax on the first R87 300 that they earn. The way we are subsidized for saving in retirement products is we do not pay tax on this invested income (up to specific limits which you can find below). When it comes time to do our tax filing, we let SARS know (insurance houses will send us statements) what our annual contributions for retirement saving were for that year and we get paid back the tax on these savings.
This is easily explained by use of an example:
Joe Soap earns R400 000 per year so he will fall into the 31% tax bracket. If Joe contributes R3000 per month to a retirement annuity his annual contributions will be R36 000. Since Joe initially paid tax on this income he earned, he is now liable for a tax rebate and this is how the tax rebate will work:
Joe paid tax on his full income of R400 000 but since he invested into a retirement product his actual tax should have been based on R400 000 – R36 000 = R364 000. In this example Joe will be able to get a tax refund of R36 000 (amount saved into an RA) * 31% (the amount of tax he paid on this savings) = (R36000*31%) = R11 160.
So even with absolutely no growth on his retirement savings, Joe would have essentially paid R24 840 (R36 000 – R11 160) but would have a retirement savings balance of R36 000. Joe is essentially getting a 45% return on investment (ROI) by simply making use of SARS subsidizing our retirement.
The contribution to pension, provident and retirement annuity funds are deductible BUT limited to the lessor of:
- R350 000
- 27,5% of the greater of remuneration/taxable income
As can be seen in the above example, the simple act of contributing to a retirement product is extremely beneficial and nowhere else can one get such a great ‘guaranteed’ return. Another bonus in this scenario is that all the growth is interest free and all the compounding happens without any deductions until retirement age when we actually draw an income from this money.
What happens at retirement?
This is a good question and one that we need to consider. We are able to retire from our Pension, Provident and Retirement Annuity Funds from age 55 and when we do exercise this option, we can withdraw up to 1/3rd as a lump sum and 2/3rd must be used to purchase an annuity where we receive a monthly income. The first R500 000 we withdraw is tax free and thereafter we will pay tax on the lump sum amounts starting at 18%. Depending on the monthly income we withdraw from our annuity, will determine the tax rate that applies. You can find more information on the SARS Website by clicking THIS LINK.