There are four basic
retirement funding vehicle that each offer different
tax advantages to encourage you to save money for
retirement.
Look at the
Retirement Product Comparisons Tool
to see the following four funds in more detail:
- Pension fund
- Provident fund
- Preservation fund
- Retirement annuity fund.
To understand the tax benefits
of using retirement funds, you need to know the
difference between pre-tax contributions and
post-tax contributions.
In a pension fund,
your contributions are
tax-deductible (up to 7.5% of your
fund salary). This means your
contributions are taken off your
salary before the amount of tax you
have to pay is worked out. In other
words, you are saving for retirement
and paying less tax.
|
Pre-tax contributions are made
before tax has been deducted from
your salary.
Gross monthly salary
Contribution |
= R10_000
= R750 |
Taxable income
Tax @ 25% |
= R9 250
= R2
313 |
Net monthly salary |
= R6 937 |
At retirement you can take up to
one-third of your retirement benefit
as cash. This will be taxed. At
least two-thirds of your benefit
MUST be used to buy a pension from
an insurer, which gives you a
monthly income when you retire.
|
|
In the provident section, your contributions are not
tax-deductible. This is the reason your employer normally pays its contributions
to the provident fund.
|
Post-tax contributions are made after you have paid tax on your monthly salary.
Gross monthly salary
Taxable income
Tax @ 25% |
= R10_000
= R10 000
= R2 500 |
Monthly salary
Contribution |
= R7 500
= R750 |
Net monthly salary |
= R6 750 |
At retirement, the full value of
your retirement benefit can be taken
as cash. If you take it in cash it
will be taxed. You can choose to use
part or all of your retirement
benefit to buy a pension from an
insurer, which gives you a monthly
income without paying lump sum tax.
|
|
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* Assuming a member has a gross monthly income of R10 000, a tax rate of 25% and a contribution rate of 7.5%
As you can see, you get better
benefits with pre-tax savings products than you get
from post-tax savings products. Although a pension
fund is a pre-tax savings product, you can also have
preferable tax concessions within a retirement
annuity fund.