According to Personal Finance-The new limits announced in this year’s Budget are likely to take effect on March 1, 2014 (see “Proposed tax deductions for contributions to retirement funds”, below).The tax proposals raised concerns that the limits would not be high enough for you to save sufficient amounts for your retirement.

But Treasury says in its document released this week that the percentage caps are more generous than they appear.It says if, for example, an employer contributes 15 percent of an employee’s salary to a pension plan and the employee contributes 7.5 percent, the total contribution is 22.5 percent of the employee’s salary.

In terms of the new proposals, the deduction cap of 22.5 percent will be applied to the employee’s salary plus the employer’s contribution – the cost to company – with the result that the tax deduction of 22.5 percent will be calculated on a higher amount.Treasury provides the example an employee who earns a salary of R125 000 a year, of which 80 percent, or R100 000, is pensionable.

If the employer contributes 15 percent of her pensionable salary to her retirement fund, or R15 000 a year, her cost to company is R140 000 (R125 000 + R15 000) a year.

If the employee contributes the maximum of 7.5 percent of her pensionable salary, or R7 500, to a retirement fund and the maximum of 15 percent of her non-pensionable salary, or R3 750, to a retirement annuity, her total annual retirement contributions are R26 250 (R15 000 + R7 500 + R3 750). This works out to 21 percent of her salary.

In terms of the proposed tax changes, the employee will be able to contribute R5 250 more if she is under the age of 45, because 22.5 percent of R140 000 is R31 500, and R12 250 more if she is over the age of 45, because 27.5 percent of R140 000 is R38 500.

Treasury also considered the rate of income replacement you will be able to achieve with your savings in retirement if you contribute to your retirement fund/s at the proposed limits for the tax deductions.

The paper notes that your replacement income depends on a variety of factors.

Nevertheless, Treasury’s research shows that if you start saving at age 35, contribute regularly, preserve your savings and your savings grow by at least two percent faster than your salary each year, you can, with contributions significantly less than the maximum tax deductions, save enough to replace 60 percent of your pre-retirement income once you retire.

Treasury says the higher contribution rate for people over the age of 45 – up to 27.5 percent of income – is to enable those who start saving later to save higher amounts to achieve an income replacement rate that is similar to those who start saving earlier.

To cater for people who have fluctuating incomes, National Treasury has proposed that contributions not deducted in one year roll over to the next year.

In terms of the proposals, retirement fund contributions that cannot be deducted against tax in any year before you retire can be taken tax-free when you retire, as part of either a cash lump sum or an annuity (pension).

Beatrie Gouws, director in legal tax design at National Treasury, says if you contribute to a retirement fund more than you are allowed to deduct for tax purposes, you will still enjoy deferred tax on the growth of your savings until retirement.

Another concern was that the proposals would dilute the incentive for employers to maintain employer-affiliated funds, because employer contributions will be added to an employee’s income for tax purposes.

Treasury says research shows that employers regard the ability to attract and retain staff as their main motivation for providing retirement benefits, and the proposed tax regime is unlikely to change this.

Another concern was that limiting the tax deductions that higher earners can claim could erode the cross-subsidisation of retirement fund administration costs from high-income earners to low-earners.

But Treasury dismissed this concern, saying only four percent of deductions for pension fund contributions were for employees who earn more than R1 million a year and who therefore may be affected by the proposed limits.


National Treasury first proposed changing the tax incentives you receive to save for retirement in the 2011 Budget. The amended proposals were released with this year’s Budget. They are:

* The contributions your employer makes to your retirement fund will be added to your income as a taxable fringe benefit;

* These contributions include any amounts paid for life or disability cover and the costs of retirement fund administration;

* If you are under the age of 45, you will be able to claim a deduction of up to 22.5 percent of your employment or taxable income (which includes the fringe benefit retirement fund contributions made by your employer) for contributions (both yours and your employer’s) made to a retirement fund, up to R250 000 a year;

* If you are aged 45 or above, you will be able to claim a deduction of up to 27.5 percent of your employment or taxable income for contributions (both yours and your employer’s) made to a retirement fund, up to R300 000 a year;

* If you are a low-income earner and the percentage you can claim as a deduction is less than R20 000 a year, you will be able to claim a deduction of at least R20 000 a year for retirement fund contributions;

* If you do not use your full tax-deductible amount for retirement fund contributions in any year, you will be able to carry the remaining amount forward to the next year; and

* Contributions for which you are unable to claim a tax deduction in any year because they exceed the limits will be paid to you free of tax when you retire, as part of either your cash lump sum or an annuity.


National Treasury is still considering how it can address a tax problem that could arise for members of defined benefit retirement funds to which employers are making high contributions, its discussion document “Improving tax incentives for retirement” reveals.

Members of these funds are concerned they will have to pay fringe benefits tax when the combined employer and employee contributions exceed the percentages that can be claimed as a tax deduction.

Defined benefit schemes pay you a pension based on a formula that takes into account your salary and your years of employment. In these funds, the employer takes the risk that there will be enough money in the fund to provide you with the pension you have been promised. As a result, at times employers may have to contribute additional amounts if the fund is in financial difficulty because of low investment returns, a lower-than-expected death rate among members or some other reason.

Some defined benefit funds have been closed to new members and have ageing membership profiles, requiring employers to make large contributions to pay out the fund’s pensioners. This may also cause the employer to make contributions that push the combined employer/ employee contribution over the tax deduction limits.

To address the potential problem, Treasury says it is considering exempting members of certain funds, on a case-by-case basis, from paying fringe benefits tax on contributions made by their employers. Alternatively, only the value of the pension promised to members of defined benefit funds may be taxed, Treasury’s discussion document says.