New retirement tax-free allowances: do the maths

Disclaimer: Please note that this article is at least 12 months old.
Any information herein was accurate when published on 10 November 2008

Subscribe to the Industry News newsfeed

1 October 2007 saw the first change in the taxing of lump sum withdrawals from retirement funds that South Africa has seen in the last twenty years. While it generated much excitement thanks to its increased tax-free allowances, Allan Heynen, director: BDO Spencer Steward Financial Services, says that upon deeper investigation retirees drawing more than R900 000 as a lump sum may be decidedly worse off.

“Under the ‘old' tax rules retirees generally received R120 000 tax-free, with the balance of the lump sum received being taxed at average rates. While the revised dispensation allows R300 000 to be withdrawn tax-free, retirees drawing more than R900 000 as a lump sum will be paying tax of 36% on any amounts in excess of the R900 000 threshold,” explains Heynen.

Under the revised tax dispensation the taxation of lump sums at retirement is as follows:
0 - R300 000 = 0%
R300 001 - R600 000 = 18%
R600 001 - R900 000 = 27%
R900 000 + = 36%

Heynen says that a far more viable alternative would be to only withdraw the tax-free R300 000 upon retirement, and transfer the balance to a compulsory annuity fund which would provide a monthly income. In this scenario, both the transfer to the annuity fund and the investment earnings within the fund would be tax-free. The pensioner would thereby have a higher capital base from which to provide an income. Although the monthly income received from the fund will be taxable, if we assume the pensioner has no other income, their annual tax liability will be a mere R29 140. The after-tax income will increase dramatically to R195 680 (23.7% higher than in the first scenario) thanks to the tax savings.

Heynen goes on to caution that once funds are invested in an income producing annuity, the pensioner cannot access any capital from the fund at a later stage.

While illustrating the two extremes, Heynen's message is clear. Do your maths before jumping at this perceived tax break. By fully considering all the tax implications and assessing your individual liquidity needs, as well as analysing the choice of your investments within the annuity fund providing your income, you might just end up with far more by withdrawing far less.

Disclaimer: Please note that this article is at least 12 months old.
Any information herein was accurate when published on 10 November 2008