RETIREMENT ANNUITIES AND TAX PLANNING

MAKE THE MOST OF YOUR RETIREMENT ANNUITIES AND TAX SAVINGS FOR 2021/2022

Now is the perfect time to make sure your contributions towards your retirement annuities (RAs) still meet your retirement goals, and to take full advantage of the current tax deduction regime.

The 2021/2022 year of assessment ends on 28 February 2022. This means you only have until the end of February 2022 to make additional (tax-deductible) contributions to your RA, or to make a lump sum (taxdeductible) contribution to a new RA if you don’t already have one.

Don’t miss out on this opportunity to maximse your tax deduction and boost your retirement savings.

WHAT IS A RETIREMENT ANNUITY?

A retirement annuity is a type of private pension fund funded by individual policies.

RAs offer you an opportunity to provide for a shortfall in retirement savings while obtaining tax deductions at the same time. Retirement from a retirement annuity is allowed from age 55 onwards (with no maximum retirement age), which encourages disciplined savings. Tax is only payable on the cash lump sum elected or on the pension income received on retirement, as an investment in an RA does not attract tax on its growth during the investment period.

RAs have a number of significant benefits, including:

  • A tax deduction (discussed below) for contributions, within certain limits.
  • Contributions in excess of the allowable tax deduction are carried forward to future years and contributions not yet allowed as a deduction may be utilised to decrease the taxable lump sum at retirement, or as an exemption against the annuity income (received after retirement).
  • Compound growth and build-up of capital without capital gains tax (CGT) or income tax payable before
    retirement.

The first R1 050 000 cash lump sum taken at retirement is effectively only taxed at 12.43%, and no CGT is payable. It is important to bear in mind that tax tables are cumulative and, therefore, each band can only be used once in your lifetime. Cash lump sums are restricted to one-third of the RA’s value, unless the total retirement benefit is less than R247 500.

  • No estate duty is payable (20% on the first R30 000 000 of the dutiable estate and 25% on the dutiable estate exceeding R30 000 000) on the investment value of an RA upon the death of a member.
  • Protection against creditors and insolvency in terms of the Pension Funds Act.
  • Choice of investment portfolios.

ALLOWABLE DEDUCTION

With effect from 1 March 2016, all contributions to retirement funds − i.e. approved pension, provident and retirement annuity funds − are treated the same way for tax purposes, with one allowable deduction totaling 27.5% of the greater of “remuneration” or “taxable income” (as defined in the Income Tax Act). The 27.5% deduction is limited to the amount of taxable income excluding any taxable capital gain, subject to an annual maximum of R350 000. In addition, employer contributions to the above funds will be treated as a fringe benefit for the employee and deemed to be contributions made by the employee for purposes of the above deduction.

PRACTICAL EXAMPLE

Let’s say you earn an annual salary of R750 000, a bonus of R150 000, and your employer is making a monthly contribution of R4 600 to your pension fund (in addition to your contribution).

If you are currently contributing R1 200 per month to your RA and R4 600 per month to your pension fund, you could consider making a lump sum contribution before the end of the tax year to obtain the maximum allowable tax deduction for the year of assessment.

Here is an example of the tax payable with and without an additional RA contribution:

CALCULATION OF TAX PAYABLE
TOTAL AMOUNT (IN RANDS) SUBTOTAL
Remuneration 955 200
Salary 750 000
Bonus 150 000
Fringe benefit employer contribution to pension fund 55 200
Less): Allowable deductions (124 800)*
RA: own contribution (R1200 x 12) 14 400
Pension fund: own contribution (R4 600 x 12) 55 200
Pension fund: employer contribution 55 200
Taxable income 830 400
Tax payable 233 137
TOTAL AMOUNT (IN RANDS) SUBTOTAL
*Maximum deduction: 27.5% x the higher of Remuneration or Taxable Income Remuneration and Taxable Income are the same in this example = R955 200 262 680
Subject to maximum of R350 000 Therefore, the total contributions can be deducted as they are less than the maximum above.
Additional allowable RA deduction 137 880
CALCULATION OF TAX PAYABLE
TOTAL AMOUNT (IN RANDS) SUBTOTAL
Revised taxable income (R830 400 – R137 880) 692 520
Tax payable 178 399
Tax saved due to additional RA contributions 54 737

To maximise the tax saving by utilising your full retirement fund tax allowance, consider a lump sum top-up prior to the end of the 2021 tax year as per the calculation above. The additional R137 880 RA contribution will result in a tax saving of R54 737.

This example is purely for illustration purposes. Each individual’s financial plan should be based on their unique circumstances, taking into account applicable legislation at the time. Tax savings should also not be the sole reason for contributing to an RA, and a full needs analysis is important.

TAX AT RETIREMENT

At retirement, annuity income (purchased with your compulsory two-thirds portion) is taxed at your marginal rate at retirement (where contributions were made that were not allowed as a tax deduction or exemption, an exemption will be applicable). A maximum of up to one-third may be taken in cash, which would be taxed as follows:

TAXABLE INCOME FROM LUMP SUM BENEFITS AT RETIREMENT
TAXABLE INCOME BRACKET TAX RATE
R0 – R500 000 0% of taxable income
R500 001 – R700 000 R0 plus 18% of taxable income > R500 000
R700 001 – R1 050 000 R36 000 plus 27% of taxable income > R700 000
R1 050 001 and above R130 500 plus 36% of taxable income > R1 050 000

Please note that prior lump sums taken upon withdrawal or retirement as well as severance benefits taken or received on or after certain specified dates are taken into account when the tax on the lump sum is calculated.

Your PWM financial planner is best placed to conduct a personal lifestyle financial needs analysis to help you meet your retirement goals.