With regards to your query, it is important to distinguish between the tax treatment of contributions made to retirement funds and the tax treatment of withdrawals from retirement funds. Your question, from what I understand, relates to tax relief on contributions towards an offshore retirement fund.

Governments incentivise citizens to save towards retirement by providing tax incentives.

Incentivising citizens to save encourages them to do so, and in so doing, reduces their dependence upon the state for support in their retirement. As a result, the state encourages the use of registered retirement vehicles, being pension funds, provident funds and retirement annuities.

Therefore, contributions made to a retirement fund registered in South Africa would enjoy tax relief on the income earned and taxed in South Africa.

It would make no sense for the South African Revenue Service (Sars) to provide tax relief for contributions to a retirement fund registered outside of the country. Taxpayers would be receiving tax breaks on money destined for another country.

Since your wife was contributing to a German pension fund, the South African government would not necessarily benefit in any way by providing tax relief on her income earned in Germany. As a result, Sars would have very little motivation to provide a tax break on contributions towards that fund.

One also needs to note that while there are tax concessions on contributions towards retirement funds, there are however tax consequences when retirees retire from those funds and begin to draw an income. The income drawn from a retirement fund by the retiree is taxed as income.

So, in essence, it would make no sense for Sars to provide tax relief for contributions being made to an offshore retirement fund when they would in turn not be able to collect taxes from the annuity payments made to the retiree from that fund. Simply put, you are given a tax break on contributions made to a retirement fund, and only once you retire from that fund are you required to pay income tax on the income you draw from it.

The real benefit is in deferring the tax payable to a later date and thus enjoying investment growth on capital that would have ordinarily been paid to Sars in the form of income tax. It is important to bear in mind that any contributions towards a retirement fund ‘saves you tax’ at your marginal rate on every rand saved while you are working.

Drawing an income from your fund during retirement will result in the tax being withheld at a significantly lower level due to the tiered nature of the tax tables. Additionally, from age 65, taxpayers benefit from a secondary tax rebate; and from age 75, they also benefit from a tertiary tax rebate. The end result is that the income drawn would be taxed at a much lower average rate than the tax saving you enjoyed on the contributions that were made leading up to retirement. The bottom line, though, is that Sars would still receive some tax.

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