Saving for retirement is one of the best financial decisions you can make, but sometimes, you may contribute more than the tax-deductible limit in a tax year. In South Africa, the tax-deductible limit for retirement contributions is 27.5% of taxable income, capped at R350,000 per year. If you contribute more than this limit, the excess amount does not provide an immediate tax benefit. However, it is not lost. Instead, these 'excess contributions' are carried forward to be used in the future, reducing tax when you retire or even benefiting your heirs if if they remain unused. 

Excess Contributions at Retirement

If you have made excess contributions over the years, these amounts roll forward each year and accumulate and can be used to reduce your tax liability when you retire. At retirement, you can withdraw up to one-third of your retirement savings as a lump sum, while the remaining two-thirds must be used to buy an annuity that pays you a monthly pension.

SARS applies a specific tax table to lump sum withdrawals, where the first R550,000 is tax-free. However, if you have accumulated excess retirement contributions, these can be deducted from your taxable lump sum, effectively reducing the amount of the lumpsum that is subject to tax.

Let's look at an example: 

You earn R1.5 million per year and contribute R400,000 to a Retirement Annuity annually. You do this for 5 out of 15 years (not every year). Your total retirement savings at retirement = R10 million. You withdraw the allowed one-third lump sum = R3.33 million.

Workings:

The tax-deductible limit is capped at R350,000 per tax year, so your excess contribututions are R50,000 per year.

The total excess contributions accumulated:

R50,000 × 5 = R250,000.

SARS applies the lump sum tax table:

Without excess contributions, the tax would be:

First R550,000 tax-free

Next R220,000 (18%) → Tax = R39,600

Next R385,000 (27%) → Tax = R103,950

Remaining R2,175,000 (36%) → Tax = R783,000

Total Tax: R926,550

Now, let’s apply the R250,000 excess contributions:

Your taxable lump sum is reduced by R250,000, making it R3.08 million instead of R3.33 million.

New tax calculation:

First R550,000 tax-free

Next R220,000 (18%) → Tax = R39,600

Next R385,000 (27%) → Tax = R103,950

Remaining R1,925,000 (36%) → Tax = R693,000

Total Tax: R836,550

Tax savings on lump sum: R90,000 (R926,550 - R836,550)

After taking the lump sum, the remaining two-thirds = R6.67 million is invested in a pension (i.e annuity). You withdraw R600,000 per year as a pension. This R600,000 is fully taxable using the normal tax tables (i.e just like your salary)

If you had any remaining excess contributions, these would be deducted from your pension, thereby reducing your taxable income and tax payable. But since you still have no remaining excess contributions, the full amount is taxable.

What Happens to Excess Contributions When You Die?

If you pass away with unused excess contributions, these can provide a valuable tax benefit to your beneficiaries. When your retirement savings are paid out to your heirs, they have the option to take the funds as a lump sum or as a pension. If they choose a lump sum, SARS applies the lump sum tax table, but any unused excess contributions from your lifetime reduce the taxable portion, meaning your heirs pay less tax on the inheritance.

If your beneficiaries opt to receive the retirement funds as an annuity, the excess contributions can be applied to reduce the taxable portion of their pension income. This means that for a period, they may receive tax-free pension payments until the excess contributions are fully used up. In this way, excess contributions do not go to waste but instead provide ongoing tax benefits even after your passing.

Final Thoughts

Occasionally exceeding the R350,000 retirement contribution limit does not mean you are losing money. While you may not get an immediate tax deduction, the excess contributions accumulate and provide valuable tax relief when you retire. They can reduce tax on your lump sum withdrawal, lower your taxable pension income, and even benefit your heirs by minimising the tax they pay on inherited retirement savings. Understanding how these excess contributions work allows you to plan for retirement more effectively.