Growing your Fund Credit through Additional Voluntary Contributions (AVCs) and the tax implications
If you want to plan for better retirement benefits from the Fund, you can increase your monthly contributions by making Additional Voluntary Contributions (AVCs) during your working career.
AVCs are deducted from your monthly salary by your Employer and paid to the Fund along with your normal pension contributions. From 1 September 2024, 1/3rd of your AVCs are allocated to your savings pot and 2/3rds to your retirement pot. You can transfer amounts saved in your savings pot to your retirement pot at any time by completing a DB-DC20 Transfer to Retirement Pot Form. Any amounts transferred from your savings pot to your retirement pot cannot be transferred back out. Making AVCs is a great way to make up for any withdrawals you may make from your savings pot during your working career.
AVCs differ from other non-retirement savings you may have, as they are deducted from your salary before tax (subject to maximum amounts set by South African Revenue Services). This is a significant advantage as it means that because AVCs are deducted from your income before tax is calculated, it reduces the tax you pay to SARS.
As your AVCs are saved in your retirement fund, they are also not subject to taxes that may be paid on other discretionary savings, for example, capital gains tax, tax on interest and dividends withholding tax.
Because your AVC contributions plus returns earned form part of your Fund Credit, they will be subject to either lump sum tax on withdrawal or retirement or income tax (on your pension) when you ultimately take your benefit.
You are encouraged to consult a tax advisor to determine the benefits for your circumstances.
If you put a little bit of extra money into your Fund Credit from as early as possible, it can make a huge difference when you are much older. (You can read more about how this works in the article DEVELOP A SUPERPOWER! in the August 2019 issue of Fund Focus.)
How can AVCs improve my retirement benefit?
Example: Philip is 25 years old and earns a pensionable salary of R240 000 per year (or R20 000 per month). His normal monthly member contributions are R1 500 (7.5%% of pensionable salary). The Employer also contributes a substantial portion to his retirement fund savings (the amount contributed by the Employer will be 14.16% of Philip’s pensionable salary less the costs of the insured benefits and a small administration fee).
Philip decides to contribute an AVC of R500 per month to his retirement savings (Fund Credit). He can expect to receive 13% more pension at age 60 (normal retirement age) provided he does not make any withdrawals from his savings pot.
This also assumes that he increases his AVC contribution in line with future salary increases. All other assumptions are in line with those used in the Fund’s annual replacement ratio projections.
In addition to being able to ‘buy’ a bigger pension when he retires, he would have enjoyed a helping hand from the ‘tax man’ over the years by making AVCs. In effect, if he made additional contributions of R12 000 per year (adjusted for salary inflation) to the Fund, SARS would be paying a portion of these AVCs each month as his taxable income will be reduced by the AVCs he made.
When should I start making AVCs?
The best time to start is now. The younger you are when you start, the longer your AVCs will have to grow in your retirement and savings pots. It is, however, never too late to start making AVCs because any AVC you make will contribute to a higher income for you in retirement. Also, the more you can save, the bigger the potential impact.
In the table below, we have shown the possible impact on your retirement benefits of starting to make AVCs at age 25, 35, 45 and 55 and then making AVCs of either 2.5% or 5% of your monthly pensionable salary.
| Starting age for AVCs | Increase in expected pension at retirement for | |
|---|---|---|
| Monthly AVCs of 2.5% of pensionable salary | Monthly AVCs of 5.0% of pensionable salary | |
| 25 | 13% | 27% |
| 35 | 9% | 17% |
| 45 | 5% | 9% |
| 55 | 1% | 3% |
Note on assumptions: The possible impact at each age is provided for illustrative purposes only. Individual member outcomes may be different from the illustrative examples presented above as these are based on several assumptions. All assumptions used to estimate the possible impact are in line with those used in the Fund’s annual replacement ratio projections. It is your personal circumstances and your own experience (including, for example, your salary increases and the investment return earned on your Fund Credit) that will determine your ultimate retirement benefit.
How do I make AVCs?
- Decide how much more you would like to contribute.
- Complete the Fund’s DC 10 form.
- Return the form to your Payroll Department (the deduction is made directly from your salary).
How are my AVCs invested?
Your AVC is invested in the same manner and in the same portfolio as your normal monthly contributions.
How do I keep track of AVCs?
Your statement, whether printed annually or viewed monthly online, shows the AVCs that you have contributed for the current tax year.