Question:

I save about 20 percent of my gross salary into my retirement annuity each month.  I read somewhere on iafrica.com that it isn't a good idea to save more than the maximum tax deductable amount (i.e. 15 percent) into an RA as this is not a cost effective way to save.

Is this right?  Should I perhaps rather save the extra five percent into something like SATRIX as this is probably the most cost effective way to gain access to the stock market?  I'm still young so I want to be almost exclusively in shares.

Answer:

It is true that a maximum of 15 percent of non-pensionable, taxable income can be claimed as a deduction against taxable income. For a person who is not contributing to a pension or provident fund this means 15 percent of the gross salary. If the RA is in addition to a retirement fund contribution, then the tax deductible portion is limited to other income.

Let me illustrate by way of a few examples:

• John earns R30 000 per month with no pension benefits. He can contribute (R30 000 x 15 percent) R4500 per month to an RA and deduct the full amount for tax purposes.

• Harry earns R30 000 per month, but contributes 7.5 percent to a pension fund and his employer contributes 7.5 percent for him to the same fund. He has no other income. He can only contribute R1750 per annum to an RA and still claim this as a deduction.

• Joe earns R30 000 per month with the same benefits as Harry, but also receives an annual bonus of R100 000 and (net) rental income of R36 000 per annum. He can contribute (15 percent of R136 000) R20 400 per annum to an RA and deduct it all for tax purposes. Note that this R136 000 fulfils the "non-pensionable, taxable income" stipulation.

Contributing 20 percent of one’s income to a pension investment is a great idea. If you do so consistently from a young age you will be well on your way to an independent retirement.

But if only 15 percent is tax deductible, is there a more advantageous way to save?

Article continues on page two: over and above the 15 percent that is tax decuctable, is there a better way to save?