JANUARY 2014
RETIREMENT
ANNUITIES
AND YOUR TAX DEDUCTION
What is a Retirement Annuity (RA)?
Benefits of an RA
How is the allowable deduction for RA
contributions calculated?
Practical example of tax savings for RA
Don’t
procrastinate!
contributions
Don’t procrastinate
Retirement Annuities (RAs)
Now is a great time to re-evaluate whether your contributions towards your
A Retirement Annuity Fund (RA) can be described as a type of private
Retirement Annuities (RAs) are sufficient to meet your retirement goals and
pension fund which is funded by individual policies. Membership of an RA
also to take full advantage of the current tax deduction regime.
is administered in terms of the rules of the Fund and regulated in terms of
The 2013/2014 year of assessment ends on the 28 February 2014. This
the Pension Funds and Income Tax Acts.
means that you effectively have a month left to make extra contributions
RAs offer an opportunity to provide for a shortfall in retirement savings
to your RAs.
and to obtain tax deductions at the same time. A taxpayer on the 40%
Note also that while the deduction is currently uncapped (based on 15%
marginal income tax rate effectively has a 40% contribution from SARS to
of Non-Retirement Funding Employment Income, (NRFI)), it will be capped
these savings! Retirement from an RA is possible from age 55 onwards,
from March 2015. Any NRFI can currently be used including a bonus, rent,
(with no maximum retirement age), which assists with disciplined savings.
business income, among others.
It is at this stage (after tax-free growth) that tax is payable.
Take this opportunity to increase your tax deduction and boost your
Your PWM Financial Planner is best placed to conduct a personal lifestyle
retirement savings. financial needs analysis to help you meet your retirement goals.
Disclaimer
The information contained in this newsletter has been compiled in good faith, however no representations or warranties, express or implied, are made to the accuracy and no responsibility or liability is accepted by the authors
or Old Mutual for any damages or losses which may flow, directly or indirectly, from the use or reliance on the any formation herein contained.
JANUARY 2014
RAs have a number of well-publicised benefits,
among them:
• A tax deduction (discussed below) for contributions to an RA, within
certain limits. (Note the change in 2015 below.)
The deduction available to taxpayers for the combined contributions to all of
the aforementioned funds will be 27.5% of the greater of “remuneration” or
“taxable income” (as defined in the Income Tax Act), subject to an annual
maximum of R350 000. (In addition, employer contributions to occupational
funds will be treated as a fringe benefit).
• Unused deductions can be carried forward to future years or used
For some taxpayers the new deduction regime may represent an improvement.
to increase the tax-free amount at (and due to recent amendments,
Others, such as small business owners who previously contributed 15%
after) retirement.
of Non-Retirement Funding Income (uncapped) to a retirement annuity,
• No tax (including no Capital Gains Tax and Dividend Withholding Tax) is
levied on the build-up of capital within the RA (only taxed at retirement).
Consider the compounding effect on tax-free returns until retirement.
At retirement your marginal rate (paid on an annuity drawn) is likely
to be lower than your marginal rate when you earned the income.
• No estate duty (20%) on retirement lump sums or annuity payments on
the death of the member. This presents a good opportunity to capitalise
for example, will have a lower allowable deduction as a result of the
R350 000 cap.
Non-Retirement Funding Employment Income
NRFI is essentially all income you earn which is not used by your employer
to calculate your pension fund contributions. You may have rental income
or interest income, for example, which would be non-retirement funding.
However, these amounts would need to be reduced by any property
on savings on estate duty in the event of a large estate (above the
maintenance expenses in respect of the rental income, and by the interest
current R3.5 million abatement). Heirs will pay tax on any income
exemption in respect of the interest, in order to compute the (current) 15%
elected/received but the capital build-up will continue to be tax-free.
calculation above.
• The first R945 000 lump sum (restricted to one third) taken at retirement
is effectively only taxed at 15% and no CGT is payable. (The tax tables
are cumulative so each band can only be used once.)
• In the event of emigration before age 55 (or an extended contractual
maturity date) the full value of the RA may be withdrawn as a lump
sum (subject to tax).
• Protected against creditors and insolvency in terms of the Pension
Funds Act.
• The annuity you receive after retirement from your RA is only taxed
when you receive it (if you defer this you pay no tax until you actually
receive it).
• Choice of investment portfolios.
Allowable deduction
The Income Tax Act currently provides for a deduction in respect of contributions
to an approved RA as follows:
• 15% of Non-Retirement Funding Employment Income (after deducting
All income earned by a self-employed person will therefore be Non-Retirement
Funding Employment Income.
Retirees
RAs may also be used by retirees to obtain a deduction against the annuity
income they may be receiving from other sources (in addition to other
available deductions), particularly since the legislated maximum retirement
age for members of RAs has been done away with.
Part of an estate planning exercise should involve consideration of how an
RA could assist with maximising the amount available to beneficiaries by
minimising the impact of estate duty on your estate.
Practical Example
Assuming that you earn an annual pensionable salary of R750 000, a (nonpensionable) bonus of R150 000, and you receive interest on investments
of R30 000 during the tax year, and receive no other income, 15% of
your NRFI would be calculated as follows:
15% [R150 000 + 30 000 – 22 800 (interest exemption for under 65s)].
Thus, 15% of R157 200, which is R23 580.
the deductions allowable against such income but excluding certain
This is greater than R1 750 and also greater than 0 (R3 500 – your allowable
deductions, for example RA contributions).
deduction in respect of pension fund contributions which is R56 250). You
• R3 500 – allowable pension fund contributions.
• R1 750.
would therefore be entitled to a deduction against your income in respect
of contributions to an RA up to R23 580 per annum (or R1 965 per month).
If you are currently contributing R1 200 per annum, you could consider
The Taxation Laws Amendment Act, 2013 introduced changes (effective
making a lump sum contribution of R23 580 before the end of the tax year
March 2015) to the deductibility of contributions to retirement funds. All
to obtain the maximum allowable RA contribution tax deduction for the year
the previous deductions for contributions to approved pension, provident
of assessment. One should not ignore the taxation applicable at retirement.
and retirement annuity funds have been consolidated into one deduction.
These benefits are illustrated in the tiered 2013/2014 tax table.
Disclaimer
The information contained in this newsletter has been compiled in good faith, however no representations or warranties, express or implied, are made to the accuracy and no responsibility or liability is accepted by the authors
or Old Mutual for any damages or losses which may flow, directly or indirectly, from the use or reliance on the any formation herein contained.
JANUARY 2014
The tax payable, taking into account this RA deduction, is
reason for contribution to an RA and a full needs analysis is important.
calculated as follows:
• Gross income:
applicable legislation at that time. Tax savings should also not be the sole
R
930 000
Tax at Retirement
At retirement, annuity income (purchased with your compulsory two-thirds
• Salary: R
750 000
• Bonus:
R
150 000
• Interest:
R
30 000
• Less: Exemptions:
R
(23 800)
• Interest:
R
23 800
• Income: R
906 200
• Less: Allowable deductions:
R
(79 830)
• RA contributions:
R
23 580
• Pension fund:
R
56 250
• Taxable income:
R
826 370
• Tax per tables:
portion) is taxed at your marginal rate at retirement, and up to one-third
may be taken in cash, which would be taxed as follows:
Taxable income from
lump sum benefits
Rate of Tax
R0 – R315 000
0% of taxable income
R315 001 – R630 000
R0 plus 18% of taxable income
exceeding R315 000
R630 001 – R945 000
R56 700 plus 27% of taxable income
exceeding R630 000
R945 001 and above
Tax on R826 370: R185 205 plus 40% (amount over R638 600). So this
R141 750 plus 36% of taxable income
exceeding R945 000
means tax of R260 313, less rebate (assuming you are under 65) of
R12 080. The total tax liability is R248 233.
If no RA contributions had been made, this becomes higher:
• Gross income:
R
930 000
• Salary: R
750 000
• Bonus:
R
150 000
• Interest:
R
30 000
• Less: Exemptions:
R
(23 800)
• Interest:
R
23 800
• Income: R
906 200
• Less: Allowable deductions:
R
(56 250)
• Pension fund:
R
56 250
• Taxable income:
R
849 950
• Tax per tables:
Tax on R849 950: R185 205 plus 40% (amount over R638 600). So this
means tax of R269 745, less rebate (assuming under 65) of R12 080. The
total tax liability is R257 665.
The above example illustrates that, using these assumptions, a total contribution
of R23 580 (or R1 965 per month) to an RA in this instance would save
the taxpayer R9 432 in tax.
This example is purely for illustration purposes only. Each person’s financial
plan should be based on their unique circumstances, taking into account
Disclaimer
The information contained in this newsletter has been compiled in good faith, however no representations or warranties, express or implied, are made to the accuracy and no responsibility or liability is accepted by the authors
or Old Mutual for any damages or losses which may flow, directly or indirectly, from the use or reliance on the any formation herein contained.