Retirement and tax – what you need to know: Part 2
Navigating tax implications before and during retirement can be tricky. In Part 2 of our series on the topic, we consider more tax-related factors that might affect your financial decision-making.
In Part 1 of this guide, we established the importance of retirement savings vehicles, described the new Taxation Laws Amendment Act, and discussed how the act affect you, both before and after retirement. In Part 2, we continue to explore how tax rules and regulations impact your retirement savings.
Tax rates for lump sum withdrawals
If you need or want to make a lump-sum withdrawal from your retirement savings before you retire, it will cost you the following in tax:
| Amount | Tax implication |
| Below R 25 000 | No tax |
| Between R 25 000 – R 660 000 | 18% tax of the amount above R25 000 |
| Between R 660 000 – R 990 000 | R114 000 plus 27% of the amount above R660 000 |
| Over R 990 000 | R203 400 plus 36% of the amount above R990 000 |
- For lump sum withdrawals made when you retire, you will be taxed as follows:
- R0 to R500 000: tax-free
- R500 001 to R700 000: 18% on the amount above R500 000
- R701 000 to R1 050 000: R36 000 plus 27% of the amount above R700 000
- R1 050 001 and above: R130 500 plus 36% of the amount above R1 050 001
Exceptions to annuity rules
There are some important exceptions to the new rules surrounding lump-sum amounts and the purchase of annuities:
- The new rules will only apply to contributions made after 1 March 2016. All provident funds will have two accounts:
- Money invested before 1 March 2016, and all growth on that money, which stays under the old rules.
- Money invested after 1 March 2016 money, and all growth on that money, which falls under the new rules.
- The requirement that provident fund members purchase an annuity only applies to those funds with a balance of more than R247 500.
- Also, anyone aged 55 on 1 March 2016 will not have to annuitise, as long as they stay in the same fund that they were in on that date.
How is your annuity taxed?
The remaining two-thirds of your savings received in the form of an annuity (pension) is taxable.
Source: www.sars.gov.za, 1 March 2018
For example, if your pension annuity was R20 000 a month (R240 000 a year) at age 65, your tax would be calculated as follows:
(R240 000 – R198 851) *26% + 35 253 – 14 067 (primary rebate) – 7 713 (secondary rebate) = R24 952.
Your monthly net income would be: R20 000 – R2 079.33 = R17 920.67 a month.
Are early withdrawals still possible?
The new Act does not affect what happens if you leave a provident (or pension) fund before retirement, regardless of whether you are leaving the fund due to a change in employment, retrenchment or dismissal.
Also, the withdrawal of the entire amount of a pension or provident fund is still possible before retirement, although this is very ill-advised. For retirement annuities, withdrawals are only possible on early retirement due to ill-health or on emigration.
Tax-free savings accounts
Lastly, tax-free savings accounts are another vehicle those saving for retirement need to consider. The tax-free savings account structure, introduced in 2015, offers an interesting way to supplement structured retirement savings. However, please note that a tax-free savings account is better suited as a supplement to retirement annuities and pension or provident funds and is not a replacement.
Tax-free savings accounts allow the investment of R33 000 a year (up to a lifetime limit of R500 000). These investments can be made in a number of different asset classes and all gains on these investments (capital gains, dividends and interest) are completely tax-free.
However, contributions are not tax deductible, which is why tax-free savings accounts should only be considered as a way to supplement whatever retirement savings you already have, especially if you are at (or near) the contribution limit of 27.5% of taxable income.
With so many complex factors to consider and a very long time horizon, it is important to get professional investment advice for your retirement savings, as well as the tax impact of choices you will need to make.
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