How Clever Planning Can Change The Tax Outcome For Your Child Or Grandchild
Many parents and grandparents want to give children a financial head start. Some buy toys. Some fund education. Some open investment accounts. A smaller group thinks further ahead and asks a powerful question: can I contribute to a retirement annuity (RA) fund for my child?
The instinct is sound. A retirement annuity, started early enough, gives compound growth several decades to work. A contribution made for a young child has the potential to remain invested until at least age 55, creating one of the longest possible investment horizons available to an ordinary South African family. But the tax answer is not as simple as many people assume. There is a big difference between a good investment idea and a properly structured tax plan. In this case, the way the contribution is made can change the outcome.
The first tax trap: The parent is not the member
Section 11F of the Income Tax Act deals with deductions for retirement fund contributions. The South African Revenue Service (Sars) summarises the current position as follows: amounts contributed to pension, provident and RA funds are deductible by members of those funds. That wording matters. If a parent pays directly into a retirement annuity where the child is the member, the parent is not the member of the fund. The parent therefore cannot claim a Section 11F deduction for that contribution.
The child is the member, but if the payment was made by the parent directly, one also needs to be careful before assuming that the child has made a deductible contribution.
The safer view is that the tax treatment must follow the actual legal and banking facts. Who made the payment? Whose money was it? Who is reflected on the tax certificate? What does the fund administrator report to Sars? This is where many families make a well-intentioned mistake. They think the tax deduction automatically follows the money. It does not. It follows the legislation, the fund membership, the tax certificate and the factual structure of the transaction.
The second tax trap: No income means no immediate refund
Even where the child is treated as having made the contribution, a minor child will often have little or no taxable income. That means there may be no immediate tax refund.
For the 2026/27 year, Sars confirms that retirement fund contributions are deductible at 27.5% of the greater of remuneration or taxable income, subject to the annual cap of R430 000. If the child has no remuneration and no taxable income, there is nothing against which to claim an immediate deduction. The contribution may still be valuable as a long-term investment, but it will not produce an immediate tax refund. The planning question then becomes: can the contribution create a future tax asset for the child?
The planning pivot: Donate first, contribute second
A more considered structure may be for the parent to donate the money to the child first, and for the child, as the member of the RA fund, to make the contribution from the child’s own bank account. This is not merely an administrative detail. It changes the factual position. The parent has made a donation to the child. The child now owns the money. The child then contributes to the child’s own RA fund. That creates a stronger argument that the contribution is a contribution by the member of the fund. It also improves the possibility that any amount not deductible immediately could become a disallowed contribution carried forward for the child’s future tax position. Sars states that contributions exceeding the limitation are carried forward to the following year of assessment and are deemed to be contributed in that following year. Sars also notes that carried-forward amounts are reduced by contributions set off against retirement fund lump sums and retirement annuities. This is where clever planning can change the outcome. The child may not get a tax benefit today, but the contribution record may potentially become valuable later when the child earns taxable income, retires from the fund, takes a retirement lump sum, or receives annuity income. The benefit is not an immediate refund. It is a deferred planning benefit.
Donations tax: The updated threshold matters
The donation step must be handled correctly. The important update is that the annual donations tax exemption for natural persons is now R150 000 per tax year. This was previously R100 000. Sars confirms that the first R150 000 of property donated by a natural person in each year of assessment is exempt from donations tax. This creates planning room for parents or grandparents who want to transfer wealth to a child in a disciplined way. For example, a parent who donates R12 000 per year to a child, who then contributes that amount to the child’s RA, should usually be well within the annual donations tax exemption, assuming the parent has not made other taxable donations that use up the exemption in that same tax year. But documentation is critical. Families should keep proof of the donation, the transfer into the child’s account, the RA contribution, and the annual tax certificate issued by the fund. Sars reporting and future claims may depend on clean records.
Do not ignore the two-pot system
Retirement annuities now also operate in the two-pot environment. Since 1 September 2024, new retirement fund contributions are split into a savings component and a retirement component. Sars explains that one-third of contributions go to the savings component and two-thirds to the retirement component. The savings component can be accessed once per tax year, subject to rules, including a minimum withdrawal of R2 000, while the retirement component is preserved for retirement. This does not destroy the long-term planning value of an RA for a child, but it does mean parents must educate the child. A retirement annuity created for a child should not become a future emergency spending account. The real value lies in leaving the money untouched for decades.
RA or tax-free savings account?
A retirement annuity is not the only option. A tax-free savings account (TFSA) may sometimes be a better first step for a child because it offers tax-free growth, no income tax on returns, no dividends tax, no capital gains tax and more flexibility. Sars confirms that from 1 March 2026 the annual TFSA limit is R46 000, while the lifetime limit remains R500 000. The trade-off is important. A TFSA is flexible, but the lifetime contribution limit is relatively low. An RA is more restrictive, but it can build long-term retirement discipline and may create future tax planning value if structured correctly. In many families, the best answer may not be RA or TFSA. It may be both, used for different purposes.
The real lesson: Structure beats intention
The parent who pays directly into a child’s RA may create a valuable investment for the child, but not necessarily a tax benefit for the parent or a clean future deduction record for the child. The parent who first donates the money to the child, ensures the child contributes as the member, keeps proper records and stays within the donations tax rules may create a better long-term planning result. The difference is not generosity. Both parents are generous. The difference is structure. This is why financial planning should not be reduced to products. The product is only one part of the decision. The tax legislation, family cash flow, donations tax position, estate planning objective, investment time horizon and future accessibility rules all matter. For wealthy families, business owners and grandparents, this can become part of a broader intergenerational wealth plan. Done casually, it may simply be a kind gesture. Done properly, it may become a structured transfer of capital, discipline and future tax efficiency.
A child does not need another gift that will be forgotten in six months. A child may benefit far more from a plan that compounds quietly for 40 or 50 years. That is the power of clever planning: it does not change the amount of love behind the gift, but it can change the financial outcome.re driven by earlier intervention, better care and sustained behaviour. At the same time, the Scheme provides essential protection when members face serious, unpredictable health events. Together, this is what shapes the future of healthcare.