With the start of a new tax year, retirement contribution planning deserves renewed attention. While tax is often viewed negatively, the retirement fund framework offers structured opportunities to reduce current tax liability while strengthening future financial security.
Contributions to Approved Retirement Funds (Employer Funds and RAs)
The Taxation Laws Amendment Act (TLAA) of 2015, effective 1 March 2016, allows individuals to deduct up to 27.5% of taxable income (or remuneration, whichever is higher) for contributions to a pension, provident, or retirement annuity fund, subject to a maximum annual cap of R350,000.
Where financially feasible, members should consider maximising this allowance. Doing so reduces taxable income in the current year while accelerating retirement savings in a tax-efficient environment.
Treatment of Excess Contributions at Retirement
Importantly, contributions exceeding either the 27.5% threshold or the R350,000 annual cap are not forfeited. These “excess” or “disallowed” contributions are carried forward indefinitely until retirement.
At retirement, accumulated excess contributions are applied by SARS in two primary ways:
- Increasing the Tax-Free Lump Sum
The first R550,000 of a retirement lump sum is tax-free (lifetime limit). Excess contributions are applied first to reduce the taxable portion of the lump sum, potentially increasing the effective tax-free amount withdrawn. - Reducing Tax on Annuity Income
Any excess remaining after the lump sum withdrawal is used to offset tax on monthly annuity income. Pension payments are effectively received tax-free until the value of the excess contributions has been fully utilised.
This structure ensures that excess contributions ultimately provide tax relief, even if the deduction is not available immediately.
Contributing a Bonus to Your Retirement Fund
Where a bonus is received, contributing it to a retirement fund may increase the deductible limit.
The deduction remains 27.5% of the greater of taxable income or remuneration. As a bonus forms part of taxable income, it increases the rand value of the 27.5% cap for that tax year.
Example:
If your salary is R720,000, your deduction limit is R198,000.
If you receive a R100,000 bonus, your total income becomes R820,000, and your new deduction limit is R225,500.
This may create additional scope for deductible contributions within the same tax year.
If Contributions Exceed the Annual Limit
If total contributions, including those funded by a bonus, exceed either the 27.5% threshold or the R350,000 annual cap:
- No tax penalty applies.
- Tax on the bonus is calculated as normal.
- A deduction is allowed only for the portion within the prescribed limit.
- The non-deductible amount is automatically carried forward by SARS to the following tax year and treated as a new contribution in that year.
Long-Term Advantages
Even where the full deduction is not immediately available, contributions remain within a tax-sheltered structure:
- No tax is levied on interest, dividends, or capital gains within the retirement fund.
- Unused excess contributions may reduce tax payable on retirement lump sums or annuity income.
Retirement Funds vs Tax-Free Savings Accounts (TFSA)
It is important to distinguish retirement funds from TFSAs when considering excess contributions:
| Feature | Retirement Funds (RA/Pension/Provident) | Tax-Free Savings Account (TFSA) |
| Annual Limit (2026) | 27.5% of income (capped at R350,000) | R36,000 |
| Penalty for Excess | None | 40% tax penalty on the excess |
| Treatment of Excess | Carried forward to future years or retirement | Taxed immediately by SARS |