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02
February 2026
Making the most of excess retirement contributions
Sonique Louw
PSG Wealth Old Oak
Most investors are aware of the 11F tax deduction in the years leading up to retirement and often try not to contribute more than the amount they can claim as a deduction each year. What many do not realise is that the real pot of gold lies in those excess contributions, the amounts that exceed the annual deductible limit, which can deliver substantial tax relief and additional benefits at retirement.
Feel free to reach out to PSG Wealth Adviser Sonique Louw directly.
How do excess contributions arise?
The Income Tax Act allows you to deduct contributions of up to 27.5% of the greater of remuneration or taxable income, capped at R350 000 per annum. If you contribute more than this, the balance does not disappear. Instead, it accumulates as excess contributions, rolling forward into future years. While this may feel unrewarding at first, these amounts create a tax relief that can be used later.
At retirement: Taking a cash lump sum
Under the two-pot system, upon retirement you may withdraw the full value of your savings component, the full value of your vested benefit in the vested component, and one-third of your non-vested benefit in the vested component as a lump sum. The remaining two-thirds of the non-vested benefit in the vested component and the full retirement component must be used to purchase a compulsory annuity (either a living annuity or a life annuity).
Lump sums taken from retirement funds are taxed according to a sliding scale. At retirement the first R550 000 is tax-free (assuming no previous taxable lump sums were taken). Excess (non-deductible) contributions can be deducted from the lump sum, before the sliding scale is applied, effectively increasing the tax-free portion of the lump sum.
Example:
Consider Mr Scannell. He retires with R4 200 000, of which R650 000 represents excess contributions. He opts to take R1 200 000 as a cash lump sum. Thanks to his excess contributions, the entire R1 200 000 could be tax-free. Without those additional contributions, a significant slice of the lump sum would have been taxed.
Cash lump sum | R1 200 000 |
Excess contribution | (R650 000) |
Tax-free portion | (R550 000) |
Taxable portion | R0 |
During retirement: Using Section 10C with living annuities
When it comes to purchasing a living annuity or a guaranteed life annuity, Section 10C of the Income Tax Act provides another form of tax relief.
The income drawn from an annuity is normally taxed as regular income. However, where the investor has accumulated excess (non-deductible) contributions, Section 10C allows these amounts to be set off against taxable annuity income until the excess contribution balance is fully used.
Example:
Consider Mrs Naidoo, who retires with R7 000 000, including R2 000 000 in excess contributions. She uses the full amount to purchase a living annuity and elects to draw R420 000 per year, with no annual inflation increases. She also receives no other income from any other sources during this period.
Because of Section 10C, her excess contributions are used to offset her taxable living annuity income on assessment. This means her annuity income remains tax-free until the R2 000 000 pool is fully utilised.
Year | Annuity income drawn | Excess contribution balance at start | Amount offset in the year | Balance remaining at year-end |
1 | R420 000 | R2 000 000 | R420 000 | R1 580 000 |
2 | R420 000 | R1 580 000 | R420 000 | R1 160 000 |
3 | R420 000 | R1 160 000 | R420 000 | R740 000 |
4 | R420 000 | R740 000 | R420 000 | R320 000 |
5 | R420 000 | R320 000 | R320 000 (balance exhausted) | R0 |
In practice, SARS will still apply PAYE to her annuity payments during the year, but on assessment she receives a refund because Section 10C allows for her annuity income to be exempt from tax up to the value of her excess contributions. Only once the R2 000 000 pool is depleted will her living annuity income become fully taxable again.
It is important to note that Section 10C relief can be affected by other factors. If Mrs Naidoo had outstanding amounts owing to SARS, her refund could be used to settle those debts first.
On death
If excess contributions remain when a retiree passes away, these can reduce the taxable portion of any lump sums taken by beneficiaries. It is important to note, however, that Section 10C applies only to the original annuitant and does not extend to surviving spouses or beneficiaries who continue with an annuity.
In addition, Section 3(3)(e) of the Estate Duty Act treats that portion of the disallowed contributions that were deducted from lump sums taken by beneficiaries as a deemed asset in the deceased’s estate. This means that even though the excess contributions provided tax relief during the retiree’s lifetime, the remaining balance could be considered part of the estate for estate duty purposes if the beneficiaries do not continue with an annuity themselves.
Why it matters
Contributing beyond the annual limits requires discipline and patience, but it can create significant tax savings when they matter most – at retirement, during retirement, or even for your family after death. Building up this pool of excess contributions should be seen not as wasted effort, but as an investment for your future.
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