This book will assist people who will soon retire, or who have already retired, to understand how tax works in relation to their retirement so that retirees can make informed, tax-efficient decisions regarding their retirement savings. It will help them to get more out of their retirement savings, as well as expose the pitfalls that they need to look out for to avoid nasty surprises.
Chapter 2
EFFECTIVE TAX OPTIONS WHEN YOU RETIRE
If you are getting close to retirement, you have probably started to think about how to make the most out of your retirement savings so that they last as long as possible while still allowing you to maintain a comfortable lifestyle. An important part in achieving this is understanding how you are taxed when you retire.
To begin with, let us consider the various options available to you when you retire. These depend on the type of retirement savings that you contributed to while you were working. There are essentially four types of retirement savings: pension funds, provident funds, retirement annuities and preservation funds. You might also have more than one type of fund if you worked for more than one employer. Generally speaking, pension and provident funds are connected to your employment, so your monthly contribution towards either of these funds will go directly from your employer to the fund before you receive your monthly salary. A retirement annuity is generally something that an individual opens up outside of their employment relationship (although in some instances it can go through your payslip and employer), and contributions are made via monthly debit orders.
A preservation fund is a fund that you have invested in when you have withdrawn from a pension or provident fund. For example, if you had a pension fund while at an employer and then left that employer, you could place that money in a preservation fund instead of transferring it to a new employer’s pension fund. You can thus have either a pension preservation fund or a provident preservation fund depending on whether you transferred into the preservation fund from a pension or provident fund. You do not contribute to a preservation fund, but it will hopefully grow over time and can form a valuable part of your retirement savings.
It is important to establish what type of retirement savings you have because they have different tax consequences when you retire. A pension, retirement annuity or pension preservation fund are all treated the same for tax purposes. When you retire (which can be from age 55 for a retirement annuity and preservation fund, or in terms of the fund rules for a pension fund, which usually specify a retirement age between 60 and 65) and wish to access your savings in either a pension, retirement annuity or pension preservation fund, you can only access one-third of the value of that fund as a lump sum (unless two-thirds of the value of the fund does not exceed R165 000).
You may find yourself in a position where you have two retirement funds. One of the funds could be worth R1 million and the other could be worth R100 000. In such an instance you would be able to withdraw the entire amount from the R100 000 fund (as two-thirds of the value of the fund is less than R165 000), but you would be restricted to taking one-third of the R1 million fund as a lump sum; the rest would need to go into an annuity (as two-thirds of the value of the fund exceeds R165 000).
“In most cases you can take up to a maximum of one-third of the fund as a lump sum upon retirement and the rest will go into either a living annuity or a life annuity.”
In other words, in most cases you can take up to a maximum of one-third of the fund as a lump sum upon retirement and the rest will go into either a living annuity or a life annuity. The main difference between a living annuity and a life annuity is that a life annuity is a guaranteed monthly payment that you will get until you pass on, whereas a living annuity could run out. There are quite a few variations available for these types of annuities, so it is best to get advice from your financial advisor on this topic. However, the monthly tax implications for both living annuities and life annuities are the same. You will receive a monthly payment from the annuity (which will be determined by the amount of retirement savings you have, the amount you choose to withdraw each month, and the type of annuity you choose), and this will be taxed in the same way that your salary was taxed when you were working. The taxation of these monthly payments are discussed in detail in Chapter 3, but it is important to understand the principle here and how it applies to your finances.
However, the law is different if you are a member of a provident fund or provident preservation fund. Up until 1 March 2021, you were allowed to take the full value of a provident or provident preservation fund as a lump sum upon retirement. Since then, this has changed as follows: If you were already 55 years of age on 1 March 2021, you are still allowed to take the full amount as a lump sum on retirement. However, this is only if you were already a member of that fund as of 1 March 2021. If you are over 55 years old but join a new fund after this date, you will be restricted to taking out one-third of the value on retirement.
If you were under the age of 55 as of 1 March 2021, any amounts contributed to a provident fund (or transferred to a provident preservation fund) before that date are earmarked, and this full amount (plus growth) may be withdrawn upon retirement as a lump sum. However, if you were under 55 years old at 1 March 2021, any amounts contributed thereafter are subject to the same one-third lump-sum withdrawal limit as a pension or retirement annuity upon retirement. The same rules apply equally for both provident funds and provident preservation funds.
When you retire, you are entitled to take up to R500 000 tax-free as a lump sum from all of your retirement savings combined. For example, if you take out a R300 000 lump sum from your pension fund and R200 000 from your retirement annuity, these amounts will be combined to give you your R500 000 tax-free lump sum. However, please note that if you have previously made any withdrawals from any of your retirement savings, this will have a negative effect on the tax you pay on your lump sum when you retire. These include withdrawals taxed in terms of the withdrawal tax tables before you reached retirement age (for instance, if you moved jobs and extracted some of your pension or provident fund) and if you have previously received a severance benefit.
Any amounts taken over and above the R500 000 upon retirement are taxed in accordance with a retirement lumpsum tax table. This looks as follows:
Table 2.1 Tax table for retirement lump sums
|
Taxable income from lump-sum benefits (R) |
Rates of tax (R) |
|
1 – 500 000 |
0% of taxable income |
|
500 001 – 700 000 |
18% of taxable income above 500 000 |
|
700 001 – 1 050 000 |
36 000 + 27% of taxable income above 700 000 |
|
1 050 001 and above |
130 500 + 36% of taxable income above 1 050 000 |
Source: www.sars.gov.za
Extracted from How to Get a SARS Refund for Retirees by Daniel Baines, out now.
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