Proof that it pays to top-up retirement annuity investment

Investing for retirement through a retirement annuity (RA) is probably the most effective and rewarding way to save for retirement because of the unique benefits offered.

The most significant benefit is that you can enjoy unparalleled tax savings which you can use to boost your retirement savings.

To get these great savings, you can top-up your RA to the limits set by the SA Revenue Service before the end of each tax year. The 2019 tax year ends February 28.

You can contribute up to 27.5% of your yearly taxable income in a RA, subject to a maximum tax deduction limit of R350 000 per year.

Furthermore, the SA Revenue Service will not penalise you for contributions that exceed the allowable limits. Instead, you will be allowed to add the excess onto the following year’s tax returns.

The proof is in the pudding

As an example, twins Thabo and Thando earn yearly salaries of R500 000. Both contribute 7.5% of taxable income into their respective RAs.

They earn a yearly bonus of R100 000 each.

Thabo goes on a spending spree. And instead of splurging her entire bonus, Thando takes a portion of her bonus to top-up her RA. After 15 years, Thando has 80% more in RAs than Thabo.

Making a decision not to topup your retirement annuity in favour of having more disposable income can be tempting but in the long run the benefits of topping up your retirement annuity far outweigh the decision not to.

Tandisizwe Mahlutshana is marketing executive at PPS Investments