HOW MUCH SHOULD YOU INVEST IN YOUR RETIREMENT ANNUITY?

Are you clueless when it comes to working out how much to invest in a retirement annuity?

Well, we’re about to teach you how to do your own retirement annuity calculation.

Retirement annuity tax deductibility

You do know that the money you invest into a retirement annuity (RA) is tax deductible, and that the tax deductible amount differs from person to person?

“Oh, you didn’t?
Well hang onto your pants – we’re about to explain how much you should invest in order to get the best possible tax benefit – unless, of course, you like giving money to the taxman!”

This is how the retirement annuity tax deduction works:

Okay, so you are allowed to deduct the greater of (Remember it says: “the greater of”):

  • 15% of your income from non retirement funding employment (after first deducting certain allowable expenses against this income)
  • R3, 500 less the allowable contribution to a pension fund, or
  • R1, 750

Now here’s the ‘dummies’ version of everything I’ve just said (This applies to 90% of us. The remaining 10% are the exception):

  • 15% of your income if you’re self employed
  • R3, 500 if you belong to a provident fund, or
  • R1, 750 if you belong to a pension fund

Let’s look at three examples of how this works:

Example one.

Peter owns a small business and isn’t a member of a pension or provident fund. He earns R10, 000 a month and his calculation works like this:

  • R10, 000 x 15% = R1, 500 a month
  • R3, 500 less his allowable contribution to a pension fund which is nil = R3, 500 per year or R292 a month
  • R1, 750 per year or R146 a month

The greater of the three calculations is R1, 500 a month or R18, 000 a year.

Example two.

Sam works for a company and is on their provident fund. Sam also earns R10, 000 a month. Of this, R9, 000 is used in calculating his contribution to the provident fund. The remaining R1, 000 is an allowance which he gets.

  • R1, 000 x 15% = R150 a month
  • R3, 500 less his allowable contribution to a pension fund which is nil (since he’s on a provident fund) = R3, 500 per year or R292 a month
  • R1, 750 per year  or R146 a month

The ‘greater of the three’ calculation for Sam is R292 a month or R3, 500 a year.

Example three.

Simon also works for a company but belongs to both a pension and a provident fund. The company contributes to the provident fund and Simon contributes 7, 5% of his salary to the pension fund. Simon’s salary is R10, 000 a month of which R9, 000 is used to calculate his contribution to the pension and provident funds. The remaining R1, 000 is an allowance.

  • R1, 000 x 15% = R150 a month
  • R3, 500 less his allowable contribution to a pension fund of R8, 100 (R9, 000 a month x 7, 5% = R675 a month or R8, 100 a year) = -R4, 600 or -R383 a month
  • R1, 750 per year or R146 a month

In Simon’s case the R150 a month is the greater of the three. You can see that the second step in the calculation gives us a negative answer. If you remember your maths from school, then you know a negative answer is always smaller than a positive number.

Cool. Now you know how to do your own retirement annuity calculation.

But if you still need help with this…

We’re willing to assist you with this, but we have two conditions:

  1. You supply us with either the correct information or your most recent payslip
  2. You are serious about starting a retirement annuity and need help in getting one started

If that’s you then complete your details in the block below.

Contact Form 2017
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4 thoughts on “HOW MUCH SHOULD YOU INVEST IN YOUR RETIREMENT ANNUITY?

  1. I would like to know more about the Tax Free Savings Account…..How does it work and what is the Minimum and Maximum amount you can put into this account.

    • Busy with an article on this right now.

      But there is also an older article on the website. Search for Tax-free savings account

  2. Eina!! Your info is outdated….”From 1 March 2016 section 11(k) of the Income Tax Act1 (hereinafter referred to as “the Act”) has been amended to provide that the tax deduction for contributions to a pension, provident or retirement annuity fund by a member of the fund will be limited to the greater of 27.5% of that person’s remuneration as defined in the Fourth Schedule to the Act or taxable income as determined before allowing this deduction.”

    • Hi,

      This is a blog so older, historical, posts remain. Our apologies. But we have written later posts on the topic.