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This week we received some questions from our users on retirement fund contributions and the laws that govern it. We hope that this helps you as you start gathering your documents for the new tax season.
1. What is the difference between a pension fund, a provident fund and a retirement annuity fund? Can I claim for contributions to all of these funds on my tax return? What about the portion my employer has contributed?
You can only join a pension or provident fund via a company that employs you. Therefore, if you are saving for retirement by way of deductions off your salary, it is most likely that you are contributing to your company’s pension or provident fund.
A Retirement Annuity (RA) is different however, in that it is a fund that is independent of your employer. If you run your own business and operate as a sole proprietor, then this is the retirement savings vehicle you would most likely be using. It is also possible to contribute to a RA via your employer and in fact, many companies are switching to RAs, which offer flexibility and choice for their employees, who are the ultimate owners of their individual RAs.
The main difference between these funds relates to how they are treated on retirement. When a pension or provident fund member retires, the member can opt to withdraw up to one third of the total benefit in a cash lump sum and the other two-thirds must be paid out in the form of a pension over the rest of the member's life. A provident fund member can however choose to withdraw the full amount at retirement if they wish.
The other difference to note, is that a member can withdraw from a pension or provident at any stage prior to retirement, however members of an RA cannot cash out prior to reaching 55 years of age.
Contributions to all of these funds are regarded as retirement contributions and you will therefore receive a tax deduction for them all. You must include your RA contribution (per your IT3(f) in the retirement annuity section. Your IRP5 will reflect the pension and provident fund contribution as a deduction already when it is pulled into your tax return and therefore you don’t need to capture these contributions again anywhere else. The amount contributed to these funds by your employer on your behalf will be deemed to be a contribution by yourself and is thus included in your total deduction.
2. Does my 27.5% apply for my lifetime and if yes, how does this work?
You can contribute 27.5% of your taxable income towards a retirement fund (e.g. pension, provident or retirement annuity) annually, so you can contribute up to this percentage of your taxable income each year, but there’s a limit of R350 000. This means that if you contributed up to the maximum of 27.5% of taxable income, and this amount exceeded R350 000, then your contribution will be limited to R350 000 and the rest will be carried over to the next tax year.
3. I called SARS and they told me that they only allowed part of my retirement annuity contributions for this tax year and that they would carry the rest over to the next assessment, do you know why they did this?
It sounds like you either exceeded the 27.5% of your taxable income when you were contributing towards a retirement fund or, if this is not the case, you might have exceeded the R350 000 limit. SARS will allow the rest of your contributions to be set off against your taxable income for the following tax year. So, you won’t lose out on your contributions- it will just be used for the next tax year and you will therefore still get the tax deduction.
4. I already contributed 27.5% of my taxable income towards the pension fund at work, do I still need an additional retirement annuity in order to receive a tax deduction?
You are unfortunately not able to contribute more than 27,5% of your taxable income towards any retirement fund to receive the tax deduction. If you already contributed 27,5% via your employer, you don’t have to contribute towards a retirement fund too, as this amount won’t be allowed as a tax deduction this year but will have to be carried forward and set off in the following tax year only. It is always good to save for your future though!
5. Can I change retirement annuity funds during the year, meaning can I stop my contributions to one fund and start a new one with a different fund? Will both be allowed on my tax return as a deduction or can I only claim one fund at a time?
Yes, you can change funds during the tax year, you however need to inform SARS of both funds and the contributions that you made during the tax year to both retirement annuity funds - this you can do on your annual tax return under the retirement annuity section.
6. Can I claim a deduction for a provident fund as I do for my retirement annuity fund contributions?
For your provident fund, your employer gives you a tax deduction each month which will reflect on your payslip. All retirement fund contributions are treated in the same way in that you can contribute a maximum of 27.5% to either your provident fund, pension fund or / and retirement annuity fund. The only difference, however, is that with the pension and provident fund contributions you will receive the benefit each month whereas in the case of a retirement annuity, if you pay it privately, the tax deduction (i.e. benefit) will only be given to you once you submit your tax return.
7. Can I transfer my pension from my current employer to my new employer?
Yes, you can, but it will consist of some extra paperwork, as SARS needs to be notified of the transfer first. Should the companies use separate funds to invest their employees pension funds with, your lump sum will have to be withdrawn from the one fund and SARS will deduct tax from the amount before the new fund can take your pension and add your new contributions to it.
After this your pension lump sum will then be added to the new employer’s pension and you won’t have to worry about it again. This process might take a few weeks depending on the workload these funds might have. This should be a tax-free process as well if you transfer directly from one fund to another.
8. Could I get a better tax deduction from SARS if I have more than one retirement annuity fund?
Yes, you can as long as the contribution is not more than R350 000 per year and it does not exceed 27,5% of your taxable income SARS will give you a bigger tax deduction if you contribute to more than one retirement annuity fund.