RETIREMENT ANNUITIES AND TAX PLANNING
MAKE THE MOST OF YOUR RETIREMENT ANNUITIES AND TAX SAVINGS FOR 2023/2024
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 2023/2024 year of assessment ends on 29 February 2024. This means you only have until the end of February 2024 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 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 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 after retirement).
- Compound growth and build-up of capital without capital gains tax (CGT) or income tax payable before retirement. The first R1 155 000 cash lump sum taken at retirement is effectively only taxed at 12.4%, 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 (at 20% on the first R30 000 000 of the dutiable estate and 25% on the amount exceeding R30 000 000) is payable 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 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, 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 | 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 | R223 298 | |
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 | R16 9524 | |
Tax saved due to additional RA contributions | R53 774 |
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 2024 tax year as per the calculation above. The additional RA contribution of R137 880 will result in a tax saving of R53 774.
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 – R550 000 | 0% of taxable income |
R550 001 – R770 000 | R0 plus 18% of taxable income > R550 000 |
R770 001 – R1 155 000 | R39 600 plus 27% of taxable income > R770 000 |
R1 155 001 and above | R143 550 plus 36% of taxable income > R1 155 000 |
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.
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 limits a penalty will be levied. The deadline for contributions for the 2024 tax year is 29 February 2024.
The benefits can be considerable 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.