RETIREMENT ANNUITIES AND TAX PLANNING
MAKE THE MOST OF YOUR RETIREMENT ANNUITIES AND TAX SAVINGS FOR 2022/2023
Now is the perfect time to make sure your contributions towards your retirement annuity (RA) still meet your retirement goals, and to take full advantage of the current tax deduction regime.
The 2022/2023 year of assessment ends on 28 February 2023. This means you only have until the end of February 2023 to make additional (tax-deductible) contributions to your RA, or to make a lump sum (tax-deductible) contribution to a new RA if you don’t already have one.
Don’t miss out on this opportunity to maximise your tax deductions 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 in 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 in 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 in the fund is less than R247 500.
- No estate duty is payable on the investment value of an RA upon the member’s death (estate duty is levied at a rate of 20% on the first R30 000 000 of the dutiable estate, and 25% on the dutiable estate exceeding R30 000 000). If the deceased member had made contributions that were not yet allowed as a tax deduction, estate duty may be payable, but only in respect of the amount of contributions not allowed as a tax deduction where the beneficiaries or dependants opt for the payment of a lump sum benefit.
- Protection against creditors and insolvency in terms of the Pension Funds Act.
- A 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 totalling 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 and subject to an annual maximum of R350 000. In addition, employer contributions to a retirement fund 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 may 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 | SUBTOTAL | |
Remuneration | R955 200 | |
Salary | R750 000 | |
Bonus | R150 000 | |
Fringe benefit employer contribution to pension fund | R55 200 | |
Less): Allowable deductions | (R124 800)* | |
RA: own contribution (R1200 x 12) | R14 400 | |
Pension fund: own contribution (R4 600 x 12) | R55 200 | |
Pension fund: employer contribution | R55 200 | |
Taxable income | R830 400 | |
Tax payable | R228 275 | |
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 | R262 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 | R137 880 |
CALCULATION OF TAX PAYABLE | ||
---|---|---|
TOTAL AMOUNT (IN RANDS) | SUBTOTAL | |
Revised taxable income (R830 400 – R137 880) | R692 520 | |
Tax payable as per the tax tables applicable to individuals for the 2022/2023 year of assessment. |
R174 245.80 | |
Tax saved due to additional RA contributions (R228 275 – R174 245.80). | R54 029.20 |
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 2022/2023 tax year as per the calculation above. The additional RA contribution of R137 880 will result in a tax saving of R54 029.20.
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. Furthermore, tax savings should 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 tax rate (an exemption will be applicable to contributions made that were not allowed as a tax deduction). A maximum of 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 the following dates are taken into account when the tax on the lump sum is calculated:
i. Lump sums that accrued upon retirement from a pension, provident, retirement annuity or preservation fund on or after 1 October 2007; and
ii. Lump sums that accrued upon withdrawal (before retirement) from a pension, provident, retirement annuity or preservation fund on or after 1 March 2009; and
iii. Severance benefits received from an employer upon retrenchment or disability, or on or after reaching the age of 55, if such severance benefit accrued on or after 1 March 2011.
TAX-FREE SAVINGS ACCOUNTS
Tax-free savings accounts were introduced in South Africa on 1 March 2015, to encourage South Africans to save more. They offer a very low pricing structure, plus growth is free of dividends tax, income tax on interest and capital gains tax. A further benefit is that you can access these funds at any time.
Currently, you are permitted to contribute a maximum of R36 000 per tax year with a maximum contribution of R500 000 over your lifetime – if you exceed either of these two parameters, tax will be levied at 40% on the amount of contributions exceeding these limits. The deadline for contributions for the 2022/2023 tax year is 28 February 2023.
The benefits can grow to a considerable amount over time and a tax-free savings account can make a valuable and flexible addition to your retirement income.
Your PWM financial planner is best placed to conduct a personal lifestyle financial needs analysis to help you meet your retirement goals.
Disclaimer:
This document is for information purposes only and does not constitute financial advice in any way or form. It is important to consult a financial planner to receive financial advice before acting on any information contained herein. PWM and its directors, officers and employees shall not be responsible and disclaim all liability for any loss, damage (whether direct, indirect, special or consequential) and/or expense of any nature whatsoever, which may be suffered as a result of, or which may be attributable, directly or indirectly, to the use of, or reliance upon any information contained in this document.