Maximising your contributions or making a lump sum payment towards your pension, provident or retirement annuity is the most efficient way to minimise the impact of rising taxes while building long term capital, says Regard Budler, head of product solutions at Momentum Corporate.
Not only will you soften the blow to your net worth, but the additional savings will benefit from the power of compound interest. This means even a small savings amount will blossom into a much greater sum over time.
The three options he suggests are: to increase the monthly amount you save towards your pension; or to make a lump sum payment; or to increase your contribution every time you get a salary increase.
He explains that employees currently earning a single source of income, such as a salary from a sole employer, are eligible to deduct any contribution towards their formal retirement savings up until the value of 27.5% of their total remuneration, or R350 000 before tax deductions and taxable capital gain – whichever is lesser.
This means that the contributions are deducted from your income before calculating the tax due, as long as the contributions fall within the prescribed limits.
For example, for high-income earners in the highest tax bracket, for every R1 000 contributed to their retirement fund they could reduce their tax bill by as much as 45%, or R450 per month. Most people could expect to save around R200 for each R1 000 contributed to their retirement savings per month.
Alternatively, Budler says one could consider making a lump sum contribution towards your retirement fund.
“If you are a member of an umbrella fund, there is a good chance that you will also be able to make additional voluntary contributions, as most umbrella funds offer this flexibility. These once-off contributions to the retirement fund offer the same tax saving benefit as regular contributions,” he says.
Another effective way to increase your contributions towards retirement it to make these increases at the salary review date.
For example, if you receive an annual inflationary adjustment to your salary of 6% and decide to increase your contribution rate towards retirement by 1%, your take home pay would roughly increase by 5% but, in only five years, you would have increased your retirement contributions by 5%, making a material difference to your retirement position without feeling the impact on your pocket directly.
Budler also points out tax can be tricky, and one should make informed decisions.