Tax rebates on retirement savings are a public good at the best of times. At times when the authorities are seen to be failing to deliver on their end of the deal, it can feel empowering to re-route some of those hard earned rands from Sars to your own retirement savings fund.

Add to this the fact that the end of the tax year is fast approaching and you will understand why there is currently a rush by retirement savers to top-up their contributions for the year, and by those who have yet to get in on the action to open a retirement annuity.

The government incentivises retirement saving because it is a public good for as many people as possible to be financially independent in retirement. The incentive they offer is to return the taxes you would normally pay on the funds you contribute to your retirement fund. There are limits, but they are generous: You can pay no tax on up to 27,5% of your taxable income up to a maximum of R350,000.

These limits apply to each tax year, which runs from March to the end of February. Those who have not already reached the limit for the current tax year (2022-23) can contribute the difference before the end of February to max out on their benefits for the year. 

For instance, if you earned R500,000 in taxable income per year, and contributed R50,000 of that to an RA during the year, you are taxed only on R450,000. If you save an additional R50,000 you are taxed on only R400,000. In other words, a portion of the income you have invested in your own future would otherwise have gone to SARS.

If we unpack this a little further (using average tax rates for the year 2022/2023) that R50,000, or 10% of your wages, invested in your RA would earn you an R16,000 refund. In effect, your R50,000 investment would have actually cost you around R34,000. If you increase your contribution for the year to R100,000, you would pay income tax on only R400,000 of your earnings. That would mean a saving of around R31,500 that you would otherwise normally have paid to the taxman, so your R100k saving effectively costs you only around R68,500. (These numbers are simplified for the sake of illustration; in reality, other factors would impact your tax and take-home calculation).

Taking this a little further still, some really savvy taxpayers will take the tax refund they receive and sink that into their RA too. This really maximises the benefit because they will get a further rebate on the rebate.

But this is not the only way that retirement annuities are great for tax-efficiency. Capital gains as well as income and dividends earned on investments held within a retirement annuity do not incur tax either. Having tax-free returns exponentially improves your investment outcomes and can never be overstated. All the taxes you have saved get reinvested and continue to grow and compound over the years.

Ultimately, the opportunity in making tax-efficient investments is unlocked through understanding what is available and how to make these benefits work best for your own circumstances. Once you get a simple understanding of how taxes can benefit you in the long-run, you start to see that opportunities abound.

The 2022/2023 tax year ends on 28 February. Speak to a 10X retirement expert about getting the most of your allowances for the past year. DM/BM

The content herein is provided as general information. It is not intended as nor does it constitute financial, tax, legal, investment, or other advice.  10X Investments is an authorised FSP (number 28250).