If you are not contributing the maximum tax-deductible contribution of 27.5% of your taxable income (limited to R350 000 per year) to your retirement fund, you might be doing your retirement plan a disservice in the long run.
There are two ways to increase your tax-deductible contributions. The first and most used one is to take out a retirement annuity on top of your compulsory fund membership of your employer-based fund. The less commonly used strategy is to make additional voluntary contributions (once off or recurring payments) to your employer-based fund.
Additional Voluntary Contributions (AVC’s) is a mechanism in terms of the rules of the fund that allows members to at any time make additional contributions over and above the compulsory member and employer contributions that must be made to the fund on a monthly basis. In theory, you are allowed to contribute an unlimited amount to your fund, but in practice it does not make sense in most cases to contribute more than the amount on which you will get a tax deduction (27.5% of taxable income capped at R350 000 per year).
If you therefore get an annual bonus, a policy pay out or if you have a secondary income stream, for example rental income or if you have investable cash at hand and you are not contributing the maximum amount that can qualify for a tax deduction, it might make sense to pay that investable amount into your retirement fund.
The benefits of AVC’s are that you can make a once off contribution, you do not enter into a new contract, you do not have any additional upfront fees or ongoing fees over and above the fees that you are already paying and your asset management fees are potentially based on the lower wholesale rates negotiated by your fund rather than the fixed, non-negotiable fees set by the provider of a retirement annuity policy.
Depending on where you are on the tax scale, SARS can make a substantial contribution to your retirement investment pot. In the table below, the effects of paying an extra 10% of your annual income (up to the maximum contribution of R350 000 per year) as an AVC are illustrated:
| SARS Contribution to Retirement | |||||
|---|---|---|---|---|---|
|
Annual Income |
R300 000 |
R600 000 |
R1 000 000 |
R1 500 000 |
R2 000 000 |
|
Compulsory Fund Contribution @ 10% pa |
R30 000 |
R60 000 |
R100 000 |
R150 000 |
R200 000 |
|
Taxable Income |
R270 000 |
R540 000 |
R900 000 |
R1 350 000 |
R1 800 000 |
|
Tax Payable for year |
R35 695 |
R117 805 |
R256 811 |
R441 311 |
R628 547 |
|
After-Tax Income |
R234 305 |
R422 195 |
R643 189 |
R908 689 |
R1 171 453 |
|
Retirement Savings for Year |
R30 000 |
R60 000 |
R100 000 |
R150 000 |
R200 000 |
|
AVC |
R30 000 |
R60 000 |
R100 000 |
R150 000 |
R150 000 |
|
Taxable Income |
R240 000 |
R480 000 |
R800 000 |
R1 200 000 |
R1 650 000 |
|
Tax Payable for year |
R27 895 |
R96 640 |
R216 163 |
R379 811 |
R564 311 |
|
After-Tax Income |
R212 105 |
R383 360 |
R583 837 |
R820 189 |
R1 085 689 |
|
Retirement Savings for the year |
R60 000 |
R120 000 |
R200 000 |
R300 000 |
R350 000 |
|
Part of AVC that is tax saving |
R7 800 |
R21 165 |
R40 648 |
R61 500 |
R64 236 |
|
Part of AVC paid by Member |
R22 200 |
R38 835 |
R59 352 |
R88 500 |
R85 764 |
Depending on your needs and your ability, it might make sense to consider AVC’s as an option to enhance your retirement savings in a cost and tax efficient manner by sacrificing some cash flow now for a larger retirement cash pot later.