Excess retirement fund contributions can create meaningful tax advantages but only if fund members understand how they are applied and when relief is realised.
During a webinar on 3 March, Carla Rossouw, the head of tax at Allan Gray, clarified the mechanics of excess contributions and addressed several misconceptions. Her presentation explained how excess contributions arise, how they are carried forward, and how they are applied in different circumstances – including while a member is still working, at retirement, during the annuity phase, and at death.
From 1 March 2026, retirement fund members may claim a tax deduction for contributions equal to the lesser of 27.5% of the greater of remuneration or taxable income (before the deduction), subject to an annual cap of R430 000. This is an increase from the previous R350 000 limit.
The cap applies only to the amount that may be deducted in a tax year. Members may contribute more than this limit to a retirement fund. Contributions above the deductible cap are not lost – they are classified as excess contributions and are carried forward for potential future tax relief.
Excess contributions can benefit working members
One common misconception is that excess contributions only become useful at retirement or after retirement. Rossouw said this is incorrect. Excess contributions may provide tax relief while the member is still employed and contributing to a retirement fund.
For example, a member might contribute more than the deductible limit in one tax year. In a later year, the member may contribute less than the allowable deduction cap. In that case, the excess contributions carried forward from earlier years can be used to supplement the deduction in the later year, enabling the member to reach the deductible cap and reduce their tax liability.
In this way, excess contributions can function as a tax-planning buffer, allowing clients to smooth their deductions across multiple tax years.
How excess contributions apply to retirement lump sums
Excess contributions can also be used to offset the taxable portion of a retirement lump sum.
Rossouw illustrated this with the following example. Assume a retirement fund benefit of R4.5 million at retirement. If the member elects to take one-third in cash, the retirement lump sum would be R1.5m.
If the member has R2m in excess contributions, these are applied against the lump sum first. In this scenario, the excess contributions exceed the lump sum, resulting in a net taxable lump sum of zero. No tax would therefore be payable on the cash withdrawal.
However, Rossouw highlighted an important misunderstanding about the R550 000 tax-free portion of retirement lump sums.
Some assume that the tax calculation allows both the deduction of excess contributions and the R550 000 tax-free portion. This is incorrect. The R550 000 is embedded in the retirement lump-sum tax table and applies only when a positive taxable amount remains after other deductions.
In the example above, because the excess contributions eliminate the taxable lump sum entirely, no amount enters the retirement tax table. As a result, the client does not benefit from the R550 000 tax-free portion.
The ‘first-come, first-served’ rule
A frequent question from members is whether they can decide when their excess contributions are applied.
Rossouw explained that they cannot. The South African Revenue Service applies a “first-come, first-served” principle. In practice, this means excess contributions are automatically applied against retirement lump sums first. Only once those have been exhausted will the retirement tax table be applied.
Members therefore cannot elect to withdraw R550 000 tax-free and defer the use of their excess contributions until later annuity income.
Excess contributions and annuity income
Where excess contributions remain after retirement, they may be applied to annuity income under section 10C of the Income Tax Act.
Rossouw used an example to illustrate the principle. Assume that after the retirement lump-sum calculation, the retiree still has R500 000 of excess contributions remaining.
If the retiree draws R150 000 in annuity income in year one, the excess contributions could theoretically offset that income. In this case, the R150 000 annuity income would be reduced by the excess contributions, and no tax would ultimately be payable on that income until the excess amount is exhausted.
However, the timing of the tax relief is often misunderstood.
Insurers paying annuity income are required to withhold PAYE when the income accrues and remit it to SARS. The offset of excess contributions against annuity income only occurs when the taxpayer files their annual tax return. This means that although the income may ultimately be tax-relieved through excess contributions, the taxpayer will typically pay PAYE during the year and receive a refund after assessment.
Importance of accurate contribution records
Because excess contributions are carried forward over time, it is essential that SARS has a complete record of all retirement fund contributions.
Rossouw cautioned that if contributions are not properly recorded – particularly contributions made in years where the taxpayer had little or no taxable income – the excess may not be recognised.
Members or their authorised representatives can confirm the remaining balance of excess contributions by accessing the ITA34 notice of assessment on eFiling, which contains a line item reflecting the excess contributions carried forward.
What happens to excess contributions at death
Excess contributions can also affect the taxation of retirement benefits paid after death.
Beneficiaries may choose to receive the benefit as a cash lump sum, purchase an annuity, or take a combination of both.
If a beneficiary elects to receive a cash lump sum, any remaining excess contributions in the deceased’s name may be used to offset the taxable amount of that lump sum.
Rossouw illustrated this with a simplified example. If a beneficiary receives a R100 000 lump sum and the deceased still had R200 000 in excess contributions, the excess will exceed the lump sum, and no tax would be payable.
However, two important points should be noted:
First, any excess contributions that are set off against a lump sum at death are included in the estate of the deceased.
Second, any excess contributions that remain unused fall away. A common assumption is that these excess contributions can be transferred to the beneficiary who becomes the new annuitant and used to offset their annuity income.
Rossouw emphasised that this is incorrect. Excess contributions accumulated in the name of the deceased cannot be transferred to beneficiaries. Only excess contributions accumulated in the beneficiary’s own name can be used to offset their annuity income.
A planning tool, but one that must be understood correctly
Rossouw’s presentation highlights that excess contributions are more flexible than many members assume. They can create tax benefits while clients are working, at retirement, during the annuity phase, and even in certain circumstances at death.
At the same time, several operational rules – particularly the automatic ordering of deductions, the timing of tax relief on annuities, and the treatment of unused excess contributions at death – mean that the practical outcomes can differ from what many members expect.
Disclaimer: This article is a general summary of the webinar and does not constitute financial, tax, or investment advice. Investors should consult their financial adviser and tax practitioner for advice tailored to their personal circumstances.
