The big distinction between the three is that you can only join a Pension or Provident Fund when you work for a company. So, if you’re saving for retirement by deducting amounts off your salary each month, it’s most likely that you’re contributing to your company’s Pension or Provident fund.
A Retirement Annuity (RA) is different because it is independent of the company employing you. If you run your own business and operate as a sole proprietor, then this is the way you will probably be saving for retirement. You can however contribute to a RA via your employer and in fact, many companies are now switching to RAs, because they offer more flexibility and choice for their employees.
The main difference between these funds is how they’re treated when you retire, or when you want to take the money out. When a member of a pension or provident fund retires, they can choose to withdraw up to one third of the total benefit as a cash lump sum, while the other two-thirds must be paid out as a pension over the rest of their life. A provident fund member can however choose to withdraw the full amount at retirement if they want to.
There is an exception to the above which applies across all three types of funds – if the entire value of the fund is less than R 247 500, then you can withdraw the entire fund value as a lumpsum.
The other difference is that a member can withdraw from a Pension or Provident Fund at any stage before they retire, however members of an RA can’t cash out before reaching 55 years old, except if they’re formally emigrating from South Africa or the amount is less than R 7 000.
Please note, rules for taxpayers who 'financially emigrate' are changing effective 1 March 2021. Taxpayers will need to be non-tax resident for three years before they can access their Retirement Annuity funds.
If you’re diligently putting money away for your retirement in the form of a pension, provident fund or retirement annuity, you’re probably familiar with the retirement fund tax laws, which came into effect on 1 March 2016.
If you’re a little sketchy on the details, here's a quick recap:
Before March 2016, the different types of retirement funds (pension funds, provident funds and retirement annuities) each had their own set of tax deductions and limitations. Which was rather confusing! However, from 1 March 2016, under the new regulations, all types of retirements funds are treated the same for tax purposes. Essentially what National Treasury is trying to do, is to encourage us all to save more and preserve our funds for longer, well into our golden years. Let’s go over all the details.
The retirement fund tax deduction
Before 1 March 2016, if you contributed to a provident fund there were no tax benefits, while pension funds and retirement annuities each had their own set of complicated deductions and limits.
As of 1 March 2016 though, this has changed. It doesn’t matter whether you have a pension, provident or retirement annuity (RA) fund – or even a combination of all three – you’ll qualify for a tax deduction of up to 27.5% of your taxable income (up to a maximum of R350 000 per year). This limit applies to the total contributions you made into all funds for the whole year.
In the case of a contribution to a Pension or Provident via your employer, the sum of your employee AND employer contributions count towards this deduction. This means you'll save a significant amount on your annual tax bill – which is a great reason to start saving for your retirement now, if you haven’t already.
Let’s say your taxable income (which includes salary, rental income, freelance income etc) is R 20 000 per month and you contribute R 1 000 to an RA and R 600 to a provident fund each month.
This means your total retirement contributions for the year are:
(R 1 000 x 12) + (R 600 x 12)
Taxable income = R 240 000
So, your ‘new’ annual taxable income (after deductions) is R 220 800. This will be the amount used to calculate your tax and not R 240 000.
Under the old laws (before 1 March 2016), the only amount allowed to be deducted would’ve been the RA contribution of R 12 000. Under the new rules, you’re getting an additional R 7 200 in tax deductions.
If you contribute above the 27.5% limit (and less than the R 350 000 cap) the excess contributions will be carried over and deducted in the next year. If, at retirement, you still have carried forward contributions, then your excess contributions can be used to decrease the tax you may need to pay on any cash lump sum you take out, or to reduce the taxable portion of your living annuity income in retirement.
It’s always best to keep a record of all the retirement contributions you make across all the different funds you contribute to each month, so you know exactly where you stand.
The taxation of your employer’s contribution
Many employers structure salaries in such a way that they make contributions on your behalf to a pension, provident or RA Fund automatically each month. These contributions will be included on your IRP5 as part of your income, and then taxed as a fringe benefit every month (you will see it listed on your payslips).
However, what’s important to note is that these employer contributions will be deemed to have been made by the employee (that’s you), and are therefore also included when SARS works out the total retirement deduction you can claim (as explained above). What this means is that even if your employer “pays” for it and you get taxed as part of your salary, SARS will allow you to deduct it as well.
We like the latest amendments to the retirement fund tax legislation. Here’s why:
If you contribute to a Pension or Provident Fund via your employer, these contributions will be reflected on your IRP5. Your employer’s contribution will be reflected on the income side and taxed as a fringe benefit, while your total contributions (i.e employer plus employee) will be shown on the deductions side. Your pension and provident fund details will therefore be pulled into your tax return via your IRP5, so you mustn’t capture these details again anywhere separately.
However, if you contribute to a Retirement Annuity personally or via your employer, you need to complete the separate section on your Tax Return for Retirement Annuity Fund contributions. This must always be done for your RA contributions (whether or not it reflects on your IRP5).
In order to complete the RA section, you’ll need to request the IT3f tax certificate from the investment house, which will reflect the policy number and amounts you contributed.
If you resign from your job, for example, you can still decide to cash in (withdraw) your full balance of your retirement fund savings, but you’re going to be taxed on the full amount based on special tax tables for lumpsum withdrawal benefits. Use our handy Lump Sum Tax Calculator to work out exactly how much the tax man will want. Remember, you can only early withdraw before retirement from a Pension or Provident Fund (not a Retirement Annuity Fund). The first R 25 000 of these types of withdrawals is tax free.
Taxpayers are encouraged not to withdraw from funds early as the tax is quite high. It’s better to stop contributing if you’re struggling to make payments, than to take the money out and pay a lot of tax.
If you withdraw from your fund due to retirement, retrenchment or death, you’ll be taxed according to the special tax tables for retirement fund lumpsum benefits. Use our handy Lump Sum Tax Calculator to work out exactly how much the tax man will want.
There is a R 500 000 once-in-a-lifetime exemption on lumpsum payouts due to retirement, retrenchment or death. So, when you retire and have not withdrawn a lumpsum before, then the first R 500 000 will be tax free!
It’s important to note that ALL lump sums received from a retirement fund, whether as a result of retirement or not (and from an employer in respect of a severance benefit) are taxed on a cumulative basis. The significant impact of this is that, when you eventually retire, the total value of all the lump sum benefits received by yourself after 1 October 2007, will be taken into account when calculating the tax payable on your current retirement fund lump sum benefit.
So, if you have had two previous withdrawals of R 40 000 each and you have paid tax (R 10 000 on each one = R 20 000 in total) then you would add the R 40 000 to the new withdrawal and work out the tax. You would then deduct the R 20 000 already paid and the difference would be your tax owing. All of this is based on the SARS lumpsum tables, so doesn’t get added to your normal income.
Your pension will be taxed in the same way as a salary, as per the normal tax tables for individuals. Your pension provider should issue you with an IT3a reflecting your annuity income for the year, which will be pulled into your tax return.
Unfortunately, what often happens is that the pension/fund provider doesn’t take off any tax when paying you the annuity each month. If you receive any other money from other funds, or if you’re still working, then you may receive a nasty surprise and have to pay in when filing your return. SARS are looking at making changes to this process, so that you aren’t stuck with a big tax bill at the end of tax season.
Luckily there are quite a few tax benefits for older South African taxpayers over the age of 65 who have retired or who are still working.
Firstly, at age 65 the tax threshold above which you begin having to pay tax is higher, at R 141 250 per year in 2023 (2022: R 135 150). What's more, those taxpayers who are older than 75-years-old get an even bigger break at R157 900 per year in 2023 (2022: R 151 100). Given the marked advantage of these higher thresholds, it would appear that SARS is starting to look out for those already in retirement. With the mandatory retirement age in South Africa sitting at 65, it would hardly be fair for taxpayers to be penalised for not being allowed to work anymore by having to pay even more tax on their savings or retirement income. SARS calls these retirement benefits secondary and tertiary rebates.
Older taxpayers are also allowed a greater interest income exemption of R 34 500.
To provide an example, it would mean that for a person of 65 years of age, the income from an investment of R 2.5 million in a money market account (earning about 5% interest per year) would be below the taxable threshold. This is because the interest would be R 125 000 (R 2 500 000 x 5%) and then the exemption of R 34 500 would be applied, to arrive at a taxable income of R 90 500, which is below the annual threshold of R 135 150. For many taxpayers over the age of 65 and even over 75 years old, this kind of investment may be their only source of income and therefore they would benefit greatly from this much needed tax relief.
It’s also important how SARS treats the medical expenses of older taxpayers. Unfortunately, at this age medical costs tend to be higher and so SARS has allowed ALL qualifying medical expenses (that aren't paid for by your medical aid) to count towards the calculation of the ‘additional medical tax credit’. Click here for more information on medical.
There are several other obscure tax benefits to being over 65, but these only apply to a small number of cases, while the ones listed above are seen more often. So, take heart that as you get older, some things do get easier, and you may have more money available than you think!
How do I know whether I have a Retirement Annuity or pension fund?
You would either see the difference on your IRP5 or on the certificate received from the fund. For a pension contribution, your IRP5 will reflect the source code 4001, for an RA this will be 4006. Otherwise you will receive an IT3f from your fund which means it is an RA.
Does it matter if I contribute different amounts each month to my RA, or one big amount at the end of the year?
No, it doesn’t matter how or when you contribute, as long as all contributions are made within the period 1 March to 28/29 February then they will be counted towards the deduction.
Do I always get a 27.5% deduction for retirement contributions?
No, this is the maximum contribution allowed - you will receive your actual contribution up to a maximum of this percentage of Taxable Income or Gross Employment Income.
Is a tax free savings account the same as contributing to a RA?
No, a tax free savings account is an investment where you pay no tax on the interest, dividends or capital gains. A retirement fund is a way of saving for your future and you’re allowed a tax deduction for your contributions. The difference is that one is an investment and the other is a form of savings.
Must I disclose the total amount on my RA certificate, or the amount contributed for the year?
You must only show the amount you contributed for the tax year when recording your contributions on your tax return. So that means the amount contributed from 1 March – 28/29 Feb each year.
Is an IT3s a certificate about my Retirement Annuity?
No, an IT3s is for a tax free savings account and not related to your RA. The IT3f is for your RA and used for your tax return.
Must I disclose each Retirement Annuity I belong to separately or add them all together?
You need to enter each RA separately, one by one, when completing your Tax Return, as you’ll need to include the name of the fund as well as the policy number too.
What if I don’t receive the IT3a from my fund?You will need the IT3a showing the lumpsum received or any monthly annuity paid to you when completing your tax return. Be proactive and ask them to send this to you in June each year, just before tax season which normally starts on 1 July.