Question:
Two years ago I changed jobs and decided to cash in my provident fund because I considered myself young (I was 28 years old at the time). I was also planning to buy a house and the money would help furnish it. I did, however, put some of the money in a retirement investment.

How can I get tax relief from this investment and other investments?

Answer:
Whilst most people save the majority of their retirement savings in their employers’ pension or provident funds, these savings are usually not sufficient to ensure the type of lifestyle they would prefer in retirement. Having said that, saving in an employer fund is certainly a good starting point. Additional savings can be made in a voluntary retirement vehicle, like a retirement annuity fund, or through other discretionary investments like endowment policies.

The Income Tax Act allows for a list of deductions to be made annually from a taxpayer’s income, thereby reducing his or her taxable income. One of these allowable deductions is for a portion of the contributions made to a retirement annuity (RA) fund during the tax-year. So in this way, RA contributions can reduce a person’s taxable income to some extent. By allowing this deduction, taxpayers are incentivised to save in a vehicle that will ultimately provide them with an income in retirement.

Contributions towards discretionary investments like endowment policies are, however, not tax deductible. The main reason for this is that these investment vehicles are often used for other savings goals and may in fact mature long before the investor reaches retirement.

You unfortunately don’t specify which retirement vehicle you have invested in. So if you have invested in an endowment, you will not receive any tax relief on your contributions.

If on the other hand you invested in a RA, the Income Tax Act prescribes how the allowable deduction from your contributions will be calculated annually. There are quite a few technical aspects to this calculation, which I won’t get into here. However, three methods are used and the one that yields the highest deduction may be applied. It often happens, though, that a person contributed more to a RA during the year than he or she is allowed as a deduction in that particular year. In such cases, the non-deductible portion may be carried over to the following tax-year to potentially be deducted then. For example, if someone contributed R3000 in a particular tax year and his or her deductable portion for that year is R2000, he or she could then add the difference (i.e. R1000) to his or her contributions for the following year. In this way, non-deductible contributions may be rolled over from one tax-year to another indefinitely until they can be deducted or until retirement. If at retirement there is still an amount of non-deductible contributions remaining, that amount may be added to the tax-free portion that can be taken as a lump sum from the RA retirement benefit, thereby increasing the tax-free portion.

The easiest way for you to facilitate the tax return process is utilizing the e-filing system. Once you have registered and requested your tax return via e-filing, you will notice a number of questions at the beginning. One of these questions is whether you made contributions to a RA fund during the tax year. This is where you will then disclose your contributions. The e-filing system is certainly proving to be quick and efficient.

If you want to submit your tax return form manually, you may find that the form you receive does not cater for additional contributions and deductions. You will then have to request a more detailed form, which will delay the process.

While you have taken a positive step towards saving for your retirement, I suggest that you consult a Certified Financial Planner to assist you in putting together a holistic financial plan that takes your current and future lifestyle goals and needs into account. The earlier you start implementing a structured plan, the easier it becomes to make financial and lifestyle decisions.

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