First up, the 2018 budget speech and your RA
In 2017 an amendment was made allowing for the transfer of your pension or provident fund to an RA if you decide to postpone retirement, or after you already retired. However, pension preservation and provident preservation funds were excluded from this amendment. This year’s budget speech proposed to include these two funds, which will allow your retirement fund to continue growing until you need it.
Another legislation amendment will sort out tax irregularities that unintentionally led to employees being liable for tax when transferring funds between, or within, retirement funds at the same employer. This amendment will be introduced retrospectively.
Your tax benefits pre-retirement
Contributions made to your retirement are tax deductible. You can enjoy tax relief of up to 27.5% of your gross salary or taxable income (subject to an annual cap of R350,000). In other words, you can reduce your overall taxable income with up to 27.5%. This will place you in a lower tax bracket, and you’ll pay less tax on your overall taxable income. If you invest in more than one RA, the same tax benefit applies to your entire retirement portfolio, i.e. the sum total of all your RA contributions.
Contributed more than you can claim against tax? The excess amount will be carried over to the next tax year.
But wait, there’s more. You also won’t be liable for income tax or capital gains tax on the investment return you earn in an RA.
Should you opt to withdraw a lump sum from your retirement package before retirement, the first R25,000 remains tax free. Remember, the ability to withdraw a lump sum pre-retirement only applies to a pension or provident fund.
You will not be able to gain access to your RA before the age of 55, however, the following exceptions do apply: when you formally emigrate or divorce. In a divorce the non-member spouse is allowed to access a portion of the benefit, subject to tax.
Tax at retirement
If you opted to receive a cash lump sum upon retirement, the first R500,000 of the lump sum remains tax-free. You can only use this tax benefit once. If the lump sum is more than R500,000, you can deduct contributions that you couldn’t claim against tax (as mentioned above) from the lump sum to reduce the amount you will be taxed on.
Here’s an example: You received a lump sum of R575,000 upon retirement. Throughout the years, contributions you couldn’t claim against tax (if, for example, your contributions went over the annual tax relief allocation of 27.5%) accumulated to R40,000.
R575,000 (lump sum) – R40,000 (contributions you couldn’t claim against tax) = R535,000
R535,000 – R500,000 (tax-free amount) = R35,000
18% (tax rate within this bracket) of R35,000 = R6,300 (the amount of tax you’ll be paying)
Because you draw an income from your retirement savings, you will also be subjected to income tax upon retirement if the income you receive goes over the tax threshold.
To give you an idea of the tax thresholds for retirement income, let’s take a look at the tax thresholds for the 2019 year of assessment. If your retirement income is less than the amounts specified below, you are exempted from paying tax:
- If you are younger than 65: R78,150 per annum
- If you are between 65 – 75: R121,000 per annum
- If you are 75 or older: R135,300 per annum
If your retirement income exceeds the above-mentioned tax thresholds, you’ll pay tax.
However, the income tax you’ll pay at retirement will more than likely be lower than what you paid during your working life.
As a retiree, you can specify the income you withdraw every month. By making an informed decision when specifying the amount you’d like to receive, you can be more tax-efficient. You also qualify for rebates specific to your age group, which reduces your tax liability. There are three rebate levels, subject to your age:
Primary level – under 65 years
Secondary level – between 65 and 75 years
Tertiary level – 75 and older
- The primary level rebate is R14,067
- The secondary level rebate is R7,713
- The tertiary rebate level is R2,574
SARS will reduce the tax owed depending on your rebate level. Both rebates and tax thresholds don’t stay the same and are usually updated every year.
Do I need to pay tax when transferring money out of RA to a living annuity?
No, the transfer is tax free. You also won’t pay tax on the returns you earn. However, you’ll pay income tax on the income you receive every month. Another benefit is that living annuities aren’t part of your estate, and therefore won’t be subject to estate duty.
(We take a closer look at the ins and outs of living and guaranteed annuities in this post)
I’m emigrating. What now?
First of all, you need to go through the formal emigration process with SARS, after which you can cash in your entire RA as a lump sum and take it with you as part of your foreign capital allowance, provided that you do this before age 55. If you have a life insurance RA, you are also more than likely to pay cancellation penalties.
You’ll then be taxed on the lump sum. The first R25,000 will be tax free, after which you’ll have to cough up 18% of the balance up to R660,000, 27% of the balance up to R990,000 and the rest at 36%.
If you belong to your employer’s pension or provident fund, you can withdraw the funds which will be taxed according to the lump sum tax table. Provident fund members can withdraw the full lump sum, however, pension fund members need to invest two-thirds into an annuity.
Sit tight, as things are bound to get tricky from here on. When you reach the retirement age stipulated in your pension fund or RA (which is 55 years), or after you’ve cashed out your pension as mentioned above, you’re obliged to purchase an annuity. Your annuity will only pay out in South Africa, and it’s your responsibility to transfer the money out of South Africa monthly or annually.
So if you’re planning to emigrate, get your affairs in order before you reach your fund’s specified retirement age. It will make matters a lot easier.
Saving for retirement is the biggest investment most of us will ever make. Sadly, it can also be very complicated. In this monthly blog, we try to answer some of the retirement questions we hear most often, ranging from which products are best suited to different circumstances to efficient tax treatments. Words by Carina Jooste.