Well, there is and it’s called making over-contributions to your retirement fund.
You might be thinking, “Wait, isn’t there a cap on how much I can contribute?” Yes, there is, but here’s where it gets interesting.
First, a quick retirement investing refresher
What Are Over-Contributions?
South African taxpayers can deduct up to 27.5% of their income (capped at R350,000 a year) when contributing to a retirement annuity, pension, or provident fund. But… and here’s the key, you’re allowed to contribute more than that, you just won’t get the immediate tax break for the excess.
These extra contributions are what we call over-contributions.
Let’s say you earn R2 million a year and put R600,000 into your retirement annuity. You can only deduct R350,000 for tax purposes this year. So what happens to that extra R250,000? It becomes an over-contribution and it can do a lot more for you than you might expect.
So, What Happens to These Over-Contributions?
Good news, they’re not lost, and you don’t get punished for going above the limit.
In fact, SARS keeps track of them and lets you claim the benefit later, either when your income allows more deductions in future years or when you eventually retire or withdraw from the fund.
In the meantime, those over-contributions are still growing tax-free inside your fund.
It’s like putting money into a vault that;
Can’t be taxed right now and grows quietly behind the scenes and will give you tax relief later (when you’ll really appreciate it)
Why This Strategy Can Be a Game-Changer
If you’re serious about building wealth and saving on tax, over-contributing can be a smart long-term play. Here’s how it can help you:
1. More Tax-Free Income in Retirement
When you eventually take a lump sum from your retirement fund, any portion that comes from your over-contributions is tax-free. Yes, you read that right.
And when you start receiving your monthly retirement income (from the two-thirds you annuitise), those over-contributions help lower the taxable portion. That means more in your pocket every month.
2. Asset Protection
Retirement funds are protected from creditors. So if you’re a business owner or have financial risks, over-contributions help safeguard your wealth in a legal, tax-smart way.
3. Built-In Discipline
You can’t access retirement funds before age 55 (unless it’s under very specific conditions). Over-contributing can help you lock away money for the long haul, avoiding the temptation to dip into it.
4. Estate Planning Perks
If you pass away and have over-contributions left in your fund, they can be used to reduce the tax your beneficiaries pay on any lump sum they receive. That means more for your loved ones, and less for SARS.
A Few Things to Keep in Mind
Before you start shifting money around, here are a few important reminders.
No Immediate Tax Break
You won’t get the tax deduction this year, but that doesn’t mean it won’t benefit you in future. Think long-term gain, not short-term relief.
Liquidity Matters
Once that money’s in your retirement fund, it’s pretty much locked in. Make sure you’re also keeping enough cash aside for emergencies or more flexible investments like taking advantage of market dips and uncertainty that sees the market make a significant contraction. (“where there is uncertaintly, there is opportunity”)
Keep Good Records
It’s vital to track your contributions and make sure SARS reflects them accurately. Over-contributions must be reported correctly on your tax return. Misreporting can lead to disallowed deductions or penalties.
Your retirement fund should issue an IRP5 or IT3(f) form showing your total contributions (split into deductible and non-deductible). Double-check it every year for accuracy.
Should Everyone Over-Contribute?
Not necessarily. This strategy can be hugely beneficial for;
- High-income earners
- Those looking to reduce estate duty or tax at retirement
- People with unpredictable income
- Investors looking to protect assets
It’s also worth balancing your retirement savings with tax-free investments, endowments, or unit trusts, depending on your need for liquidity and flexibility.
How to Implement This Strategy
Run the numbers with a financial advisor.
Consider your full financial picture. Retirement age, income, debt, cash needs, and other investments.
Create a plan to systematically over-contribute where it makes sense.
Keep your paperwork tidy and update your tax records annually.
The word “over-contribution” might sound like you’re doing something wrong. But when used intentionally, it can be one of the most powerful tools in your retirement strategy.
More money growing tax-free. More tax relief in retirement. More financial security.
Why wouldn’t you take advantage?
Thinking of making over-contributions part of your plan? Chat to an independent financial advisor who can help you make smart, tax-efficient decisions that align with your long-term goals.
Image courtesy Gerd Altmann
Adapted from this article
