Tax Tuesday: Tax and retirement

In this blog we’ll look at what it means to be a taxpayer once retired. Before we start, it’s important to keep in mind that a retirement annuity (RA), pension or provident fund may usually only be accessed at a certain age. If you’re planning an early retirement, it would be advisable to have funds that can be easily accessed, such as a tax-free savings account or other discretionary savings.

Retirement lump sum

Let’s start with the RA/pension fund lump sum payout that becomes available once you reach retirement age.

Taxpayers who are members of an RA/pension fund may take one-third of their savings as a lump sum in cash. Taxpayers who are members of a provident fund may take the full amount of their savings as a lump sum in cash. It’s important to note that your tax bracket, as determined by your monthly salary upon retirement, doesn’t determine the tax levied on the lump sum payout.

The table below indicates the tax payable for the 2019 tax year ending on 28 February 2019.

Lump Sum	Rate of tax (R)
0 – 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

Remember, the lump sum is a lifetime aggregate and isn’t determined on a per withdrawal/payout basis. This means that the tax payable is based on the overall one-third lump sum. So if you’ve made a previous withdrawal from your one-third allocation, it gets added to any future withdrawals when determining the tax payable.

Tax brackets and rebates

Now that you have withdrawn the allowed amount from your RA/pension fund as a lump sum and paid the relevant taxes, the remainder is placed in either a living or life annuity.

Your discretionary savings and tax-free savings, should you have these funds, don’t need to be invested in a living or life annuity, so you can continue to access and manage those funds as you please.

The income received from the annuities and your discretionary savings is then taxed similarly to your salary prior to retirement. The table below indicates the tax payable for the 2019 tax year ending on 28 February 2019.

Taxable income	Rates of tax (R)
0 – 195 850	18% of taxable income
195 851 – 305 850	35 253 + 26% of taxable income above 195 850
305 851 – 423 300	63 853 + 31% of taxable income above 305 850
423 301 – 555 600	100 263 + 36% of taxable income above 423 300
555 601 – 708 310	147 891 + 39% of taxable income above 555 600
708 311 – 1 500 000	207 448 + 41% of taxable income above 708 310
1 500 001 and above	532 041 + 45% of taxable income above 1 500 000

The main difference with being a taxpayer in retirement – if you aren’t like Stealthy aiming to retire early – is the additional tax rebates linked to your age. All taxpayers get a primary rebate on tax paid to SARS of R14,067. However, if you are 65 or older you get a secondary rebate of R7,713. If you reach the young age of 75 – or if you are like Simon going to live to 100 – you get a tertiary rebate of R2,574. These rebates are as per the current tax year.

So in a nutshell: If your annual taxable income is less than R78,150 (primary rebate), R121,500 (secondary rebate) or R135,300 (tertiary rebate), you won’t pay tax.

However, if you are retired, it doesn’t necessarily mean that you have stopped working. You may generate an income from a share portfolio, a property portfolio or a business on the side. This would potentially mean that you will need to pay provisional tax. We will discuss provisional tax and the tax implications of running a home office in our upcoming blogs.

Interest exemption

Besides the rules regarding the tax brackets and the rebate structure mentioned above, your retirement portfolio will potentially consist of mainly low-risk investments, and therefore, you would expect interest income rather than share growth and dividend income. SARS does help a little in this regard by increasing the normal interest exemption from R23,800 (capital amount of R396,667 at 6%) to R34,500 (capital amount of R575,000 at 6%) for individuals 65 years or older.

It may be wise to withdraw R500,000 from your retirement fund upon retirement and invest a portion in an interest-bearing account to utilise the interest exemption. In this way, you can maximize your tax-free income after retirement.

Medical expenses

During retirement, a medical aid rebate also reduces payable tax. The rebate is a fixed monthly amount which increases according to your number of dependants. See below table for the 2019 tax year ending on 28 February 2019.

Monthly rebate

R310 per month for the taxpayer who pays the medical scheme contributions

R310 per month for the first dependant

R209 per month for each additional dependant(s)

However, you may also require extra medical treatment as a retiree. SARS offers an additional medical rebate calculated against qualifying “out of pocket” medical expenses paid by you for your or a dependant’s treatment. The allowed amount of the additional medical rebate depends on a person’s age and whether the person, his or her spouse or any of their dependant(s), have a disability.

In next month’s blog, we’ll focus on the calculation of both the medical aid rebate and the additional medical rebate.

Being tax efficient is an important part of great financial management. In this blog, a group of South African tax experts share their tips and explanations on tax issues. Learn everything you need to know about tax, from deductions you never knew about to retirement savings and capital gains. The first Tuesday of every month is Tax Tuesday. Don’t miss it!