Tax benefit of contributions to pension, retirement funds
We all wish to save as much as possible for the day we retire. It is important to start saving for retirement as soon as possible as most people end up retiring with insufficient funds to last them until they pass away.
The tax implications of an investment we use to do so is therefore important to understand, specifically whether the additional funds or annuities invested are deductible for tax purposes. This is often the selling point for brokers who market these products.
In terms of Section 17 (1)(n) of the Income Tax Act, contributions to any pension fund and/or provident fund are only deductible where making such a contribution is a condition of the holding your office or employment. It is therefore important that belonging to a pension or provident fund is a condition of employment stipulated in your employment agreement to qualify for this deduction.
The requirement for retirement annuity fund (“RAF”) contributions is different. In terms of Section 17 (1)(q) the contributions by any member of a retirement annuity fund are deductible where such person has carried on any trade.
Trade includes every:
• profession;
• trade;
• business;
• employment;
• calling;
• occupation; and
• venture,
• including the letting of any property
Therefore taxpayers will often contribute to a RAF in their personal capacity in addition to the pension fund contributions as part of employment. This deduction therefore also applies to sole traders that are not employed, but run their own businesses.
The total deduction for the above combined with deductions for educational policy premiums (i.e. policies where you save money for your children to study), is limited to N$40 000 per annum per taxpayer.
Therefore, no tax deduction may be claimed for additional contributions if the annual contributions exceed N$40 000 per annum. You are allowed to make contributions in excess of N$40 000 per annum, but you will not get a deduction for tax purposes for this.
The N$40 000 limit per annum is in my opinion much too low and has not kept up with inflation over the years. This limit has not been increased in a very long time and we have requested Inland Revenue to lift this amount to ensure that people are encouraged to save more for retirement.
It is important to note that premiums paid for life insurance and products other than RAF are not always deductible under 17(1)(q) unless it relates to a product for which your broker has specific rulings/directives from Inland Revenue that allows such a deduction.
It should be noted that once you “cash in” your pension fund that there may be tax due thereon (i.e. withdrawal of funds where you change employment and do not transfer it to another approved fund), unless this happens on retirement in which case 1/3 of the amount (i.e. usually paid out as a lump sum) would not be subject to tax.
Johan Nel is a partner: corporate tax service at PwC Namibia. This series on tax is published in Market Watch bi-monthly on a Monday.
The tax implications of an investment we use to do so is therefore important to understand, specifically whether the additional funds or annuities invested are deductible for tax purposes. This is often the selling point for brokers who market these products.
In terms of Section 17 (1)(n) of the Income Tax Act, contributions to any pension fund and/or provident fund are only deductible where making such a contribution is a condition of the holding your office or employment. It is therefore important that belonging to a pension or provident fund is a condition of employment stipulated in your employment agreement to qualify for this deduction.
The requirement for retirement annuity fund (“RAF”) contributions is different. In terms of Section 17 (1)(q) the contributions by any member of a retirement annuity fund are deductible where such person has carried on any trade.
Trade includes every:
• profession;
• trade;
• business;
• employment;
• calling;
• occupation; and
• venture,
• including the letting of any property
Therefore taxpayers will often contribute to a RAF in their personal capacity in addition to the pension fund contributions as part of employment. This deduction therefore also applies to sole traders that are not employed, but run their own businesses.
The total deduction for the above combined with deductions for educational policy premiums (i.e. policies where you save money for your children to study), is limited to N$40 000 per annum per taxpayer.
Therefore, no tax deduction may be claimed for additional contributions if the annual contributions exceed N$40 000 per annum. You are allowed to make contributions in excess of N$40 000 per annum, but you will not get a deduction for tax purposes for this.
The N$40 000 limit per annum is in my opinion much too low and has not kept up with inflation over the years. This limit has not been increased in a very long time and we have requested Inland Revenue to lift this amount to ensure that people are encouraged to save more for retirement.
It is important to note that premiums paid for life insurance and products other than RAF are not always deductible under 17(1)(q) unless it relates to a product for which your broker has specific rulings/directives from Inland Revenue that allows such a deduction.
It should be noted that once you “cash in” your pension fund that there may be tax due thereon (i.e. withdrawal of funds where you change employment and do not transfer it to another approved fund), unless this happens on retirement in which case 1/3 of the amount (i.e. usually paid out as a lump sum) would not be subject to tax.
Johan Nel is a partner: corporate tax service at PwC Namibia. This series on tax is published in Market Watch bi-monthly on a Monday.
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