Stepping up your retirement savings – RA or employer fund?

Gielie de Swardt, head of Retail Distribution at Sanlam Investments

By Gielie de Swardt, head of Retail Distribution at Sanlam Investments.

The end of the tax year is just around the corner and smart investors are doing the calculations to find out exactly how much they can still put into their RA before the gates to tax-relief paradise slam tight – for this year. The good news is that you can now allocate up to 27.5% of your total annual income to a retirement fund and pay less tax for the year.

Even if you’re not able to make the maximum tax-deductible contribution, every hundred rand that you can set aside for retirement is a heroic act of taking care of your future self, considering the financial squeeze South Africans are currently experiencing.

For the self-employed, a retirement annuity (RA) is the go-to solution for reducing the amount of annual income on which you need to pay provisional and final assessed tax every year – and it builds financial reserves for those later years (after age 55) in which you may want to reduce your working hours or simply take a break. In addition, it provides a safety net in case you are ever liquidated; creditors are not allowed to touch the money saved up in an RA.

For employees, both their employer’s retirement fund and an RA provide all the benefits above, making it difficult to choose between the two options. But what exactly is the difference between contributing more to your employer’s fund and topping up your RA?

The timing of your contribution and tax ‘refund’

With an RA, employees will only be rewarded with a tax refund (provided you don’t have sources of income other than your salary) for any RA top-ups during this tax year (1 March 2018 to 28 February 2019) after you’ve filed your tax return and SARS has completed the assessment. The 2018/19 filing season opens on 1 July 2019, which means that – even if you file your return on the very first day of the tax season – the earliest you’ll receive a tax refund in your bank account is towards the end of July.

If you want to add money to your employer’s fund, you normally need to commit to the increased contribution for a year and many companies will only allow you to change the monthly contribution amount on a fixed date every year. You don’t have the flexibility to simply top-up your employer’s fund on an ad hoc basis. You therefore need to make sure that you’ll be able to afford the higher amount for an entire year. On the upside, this enforces the discipline of living off a smaller net salary so your savings can grow faster.

Also, importantly, with higher employer fund contributions the tax relief is immediate from the day you increase your contribution – you don’t need to wait for a tax refund later in the year. Your payroll administrator will re-calculate your taxable income and you’ll see a lower tax amount on your payslip. For example, if you’re in the 36% tax bracket, an additional R1000 monthly contribution to your employer’s fund will lead to only R640 less in your bank account. You’ll save R360 per month in tax straight away, while your life savings are growing by R1 000 more per month. Put differently, SARS is giving you R360 to save R1 000 more every month for yourself.

View our RA refund infographic to see more examples of how much tax you can save this 2018/19 tax year if you contribute to an RA.

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