BY ANNA RICH
Maximising your contributions to a retirement fund – a pension fund, provident fund or retirement annuity (RA) – is the single most effective way of reducing your tax bill for the 2021/22 tax year, and experts agree it’s better to spread your contributions over the year than invest a large lump sum at the end of it.
Mica Townsend, business development manager and employee benefits consultant at 10X Investments, says: “If you’re not using the maximum tax allowance (by contributing 27.5% of the greater of your taxable income or remuneration, to a maximum of R350 000 a year, to a retirement fund), you are basically rejecting the government’s offer to return some of your taxes to you. Along with tax-free savings accounts, retirement contributions are the most tax-efficient way to save.”
There are further benefits. Gareth Collier, who has the Certified Financial Planner accreditation and is a director at Crue Invest, says: “You do not pay tax on interest, dividends or capital gains while you’re invested in a retirement fund, which offsets the negative effects of tax on your interim and future income.”
For salaried employees whose benefits include an employer-sponsored pension or provident fund, there is generally a set range of contribution rates.
“You should try to increase your contributions to a level that you are comfortable with,” Collier says. “Contributions to your company’s retirement fund are made pre-tax, which allows you to gear up your savings to provide you with a pensionable income once retired, instead of paying taxes that will most likely not benefit you at all.”
Your employer might limit the opportunity to change your contribution rate to a certain time of year.
“Changes are admin-intensive, so it is easier for big corporates to do everything in one month instead of every time an employee wants to change their contribution rate,” says
Collier. “Talk to your HR department about your company’s policy.”
Alternatively, you could supplement your contributions to your employer’s fund by setting up an RA. And if you are self-employed, this is the appropriate vehicle for gaining the tax benefit.
As to the timing of these investments – monthly, or as a lump sum at the end of the tax year – Collier says it is not an either-or situation.
“It depends how much you are able to invest throughout the year. You can do both. If your income is R15 000 a month and you receive a year-end bonus of R15 000, it is a good idea to do a monthly debit order against your income and a lump-sum investment from the R15 000 bonus to maximise your retirement contributions.”
Townsend says: “There’s always a bit of a scramble in February, and some people miss the cut-off date for the tax year-end.”
She recommends regular monthly contributions, rather than ad hoc annual contributions, for several reasons.
“If you make a big investment in late February, unit prices could be high. It is better to spread your exposure across the year, which evens out any volatility in the market.”
Behavioural economists have observed our present bias, and one way this manifests is in the tendency to favour money in our pockets today over security in retirement. Monthly payments counter this effectively, because the amounts involved are much smaller than a large sum just before tax year-end.
“Once a monthly payment is set up, you might soon not even notice that amount going off your account. It will become part of your normal expenses, like rent or your bond,” says Townsend. “Also, you will see how relatively small sums start to add up.”
Contributing monthly harnesses the power of time.
“Money invested at the beginning of the tax year has almost 12 months longer to compound than money you invest at the end of the year,” says Townsend. “Over time, this can put you at a significant advantage.”
OTHER THINGS YOU CAN DO
Besides retirement contributions, there are other ways to reduce your tax. Here are some of them:
- Medical scheme fees tax credits. If you contribute to a medical scheme, the monthly tax credit (for the 2022 tax year) is R332 for the main member, R664 for a member with one dependant and another R224 for each additional dependent. The total is multiplied by 12.
There are potential additional medical expenses tax credits related to contributions and for out-of-pocket expenses not covered by your medical scheme. To claim the latter, keep all receipts. Submitting them all to your medical scheme (even if you know they will be rejected as they aren’t covered) will ensure they are on record.
- Travel and subsistence expense claims. Proof of business travel (a logbook recording the date of each business trip, distance and destination) and expenses such as fuel, service, licence and insurance, and slips for out-of-town expenses, such as accommodation, meals and incidentals are needed.
- Expenses incurred as a selfemployed person. These could include advertising costs, rental of equipment and property, or costs of keeping a home office space (such as a portion of rental or interest on your bond, rates and electricity), entertainment, phone and stationery.
“If you are self-employed, you have more options available to you to improve your tax efficiency, compared with those who work for an employer,” says Collier.
PERSONAL FINANCE