3 Reasons you should maximise your RA with a lump sum contribution

Published on 21st December, 2023 at 02:41 pm

Making a lump sum contribution to your retirement annuity (RA) before the end of the tax year has numerous benefits, from saving on tax to earning more interest. 

Reading time: 3 minutes

In this article, you’ll learn:

• Why you can pay less tax when you make a lump sum contribution to your retirement annuity before the end of the tax year.
• How much you can pay into your RA and what happens if you pay in more.
• The long-term benefits of making a lump sum contribution to your RA.

The start of the year is a flurry of expenses, from school fees, uniforms and textbooks to recovering from the festive season. But did you know you could reap financial benefits by paying a lump sum into your retirement annuity (RA) before the end of the tax year on 29 February 2024? Bennie Wessels, product actuary at Sanlam, explains the advantages of this strategy…

You can pay less tax

Contributions to an RA are tax-deductible up to certain limits. If you make a lump sum contribution to your RA, your taxable income will be reduced by this amount, meaning you will pay less tax.

For example, for every additional R10 000 lump sum contribution that you make before the end of the tax year, you could save tax of up to R4 500, depending on your marginal tax rate, and subject to the overall deduction limit per year. Apart from the tax saving on the lump sum that you contribute, you will also not pay any tax on the growth you earn on this sum while it is invested in the RA, says Wessels.

The tax benefits rolls over if you exceed your RA contributions in a tax year

The tax deduction is limited to 27.5% of the higher of your taxable income or remuneration, capped at R350 000 per tax year.

This limit applies to all your contributions made to retirement funds. If applicable, you should take any contributions to a pension or provident fund into account to determine whether you have reached the limit. The tax benefits for contributions in excess of these amounts will roll over to the following tax year and be deducted from future taxable income.

Compound interest will work in your favour

Compound interest is the interest earned both on the money you originally invested and the interest that money has already earned. Compound interest gets to work on your contribution in the long term.

If you earn a return of 9% per annum on the lump sum, your money will double roughly every eight years.

If you are 30 at the time that you make the R10 000 contribution, it could grow to more than R200 000 by the time you retire at 65.

If you haven’t already opened a Sanlam Cumulus Echo RA, now is the time to take advantage of the tax benefits it offers. It’s also a Wealth Bonus participating product, which means when you take out the RA, stay invested, and continue to make regular contributions to your investment, your Wealth Bonus grows along with it.

Sanlam Life is a licensed life insurer, financial services provider and registered credit provider (NCRCP43).