Tax planning for retirement
By Jenny Gordon, head: Retail Legal
Agenda
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Tax deductions on contributions from 1 March 2015
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Non-retirement funding income
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Tax during build up
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Tax on transfers
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Tax on lump sum withdrawals, retrenchment, retirement
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Tax on death
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Tax on disability
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Estate planning and retirement annuity funds
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Medical tax credits

Tax on discretionary investments
Current tax on contributions
Employer contributions on pension and provident funds are
deductible up to 20%
Contributions 1 March 2015
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One deduction for all funds
Individual’s deduction
27,5% of remuneration or taxable income
Maximum R350 000 per year ( R 1 272 727)
Carry over of over contribution against lump sums
Employer contribution deemed to be fringe benefit of
employee
 Commute for a lump sum when 2/3 is R100 000
 27,5% includes cost of life cover and administration
charges
Taxable income versus remuneration
 27.5% of taxable income or remuneration
What is taxable income?
 Includes annuities, capital gains, remuneration less
deductions
What is remuneration?
 Salary, leave pay, bonus, gratuity, commission, R350 000
annual cap applies across all funds
No distinction between retirement fund income and non
retirement fund income under the new system
 If employer pays 7% and employee 7% of salary =14%
 27.5% - 14% = 13.5% of salary remaining for RAF
Contributions by employers and members
 If the employer contributes on your behalf, the
contribution amount will be added to your payslip as a
fringe benefit
 You will then get a tax deduction equal to that fringe
benefit amount.
 The tax deduction effectively eliminates the tax paid on
the fringe benefit, putting you in a tax neutral position.
Retirement funding income vs Non-retirement funding
Pensionable versus non-pensionable
 If salary was used to base employer contribution =
pensionable
 If bonus not = non-pensionable or non-retirement
funding income
 Retirement annuity funds 15% of non-retirement
funding income
 If employer 7% and employee 7% = 14%
 But if all RFI
 Then no NRFI so no tax deduction for retirement annuity
Example
Mr X earns R1million salary.
 He sells shares and makes a
capital gain of R300 000.(33.3%
taxable)
 He earns rental income of
R100 000 from his second
property. But has expenses of
R90 000
 He sells his third property and
makes a capital gain of
R500 000.(33.3% taxable)
He is a member of a pension
fund with his employer.
The contribution rates are 13%;
15%;17%;19% of pensionable
salary. Pensionable salary is
75% of remuneration.
He chooses 19%
How much can he contribute to his
pension fund? And how much can he top
up with a retirement annuity fund?
Salary
CGT on shares (33.3%)
Rental (R100 000 – R90 000)
Sale of Property (33.3%)
Total
R1 000 000
R100 000
R10 000
166 500
R1 276 500
27.5% of remuneration = R275 000 or
27.5% of taxable income = R 351 037
(capped at R350 000)
19% x R750 000 = R142 000
R350 000 – R142 000 = R208 000
He can perhaps make a contribution to a RAF
or some funds provide for AVCs
Build up in a retirement fund
No dividends tax
No income tax
No capital gains tax
No estate duty – both lump sums and annuity
Preservation
Preservation
encouraged
Tax-free transfers from
1 March 2015
Preservation
Currently
 Preservation encouraged
 Pension to all (except provident) = tax free
 Provident to all = tax free
 RA to RA
From 1 March 2015
All tax free
Withdrawal before retirement
Taxable lump sum
2014/2015
Rate of tax
R0 – R25 000
0% of taxable income
R25 001 – R660 000
18% of taxable income above R25 000
R660 001 – R990 000
R114 300 + 27% of taxable income above
R660 000
R990 001 +
R203 400 + 36% of taxable income above
R990 000
Lump sums at retirement, retrenchment, death
Taxable Lump sum
2014/2015
Rate of tax
R0 – R500 000
0% of taxable income
R500 001 – R700 000
18% of taxable income above R500 000
R700 001 – R1 050 000
R36 000 + 27% of taxable income above
R700 000
R1 050 001 +
R130 500 + 36% of taxable income above
R1 050 000
Severance benefit
 Means any lump sum benefit from an employer (not from a
fund) on termination of service if:
 Age 55
 Ill health
 Retrenchment
 Same table as retirement funds
 If you have used your tax-free amount on severance benefit can’t
have it again
Withdrawal and retirement tables
Withdrawal table
Retirement table
Tax on R1 050 000
Tax on R1 050 000
= R 203 000 + R 21600
= R 225 000 (21.42%)
= R 130 500 (12.42%)
R225 000 less R130 500
Difference = R 94 500
What happens if I contribute more than I can deduct?
3 possibilities
1. Carry over to following years
2. Offset against lump sums on retirement or withdrawal
3. From 1 March 2014 contributions which weren’t deductible
can be offset against annuity income
Example of carry over
 2015/2016: Assume maximum deduction is R350 000
contributed
R450 000 (over contribution R100 000)
 2016/ 2017: 27.5% of taxable income is R300 000
but only contributed R150 000
 R300 000 less R150 000 = R150 000
Can carry forward R100 000 of the over contribution made in
the 2015/16 tax year.
Example of deducting against lump sums in retirement
 Assume over lifetime R500 000 contribution not deductible
 On retirement: 1/3 of retirement capital = R 6 million:
 1/3 = R2 million
 R500 000 + retirement table = tax on lump sum
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R500 000 +
R500 000 @ 0% = R1million tax free
R500 000 – R700 000 @18% = R 36 000
R700 000 – R1050 000 @ 27% = R 94 500
Balance taxed at 36%
Write-off against compulsory annuity income
 Since 1 March 2014
 Any contribution which was not tax deductible can be set off
against compulsory annuity income until the full contribution
has been written off
 The over contribution must first be set off against lump sums
 If lump sum less than the over contribution the balance can be
set off against compulsory annuity income
 Can elect not to take a lump sum
Example of writing off against compulsory annuity
When Mr A retired from employment he took 1/3 in cash and bought a
compulsory annuity with the balance. He currently draws R20 000 per
month from the annuity. After retirement he contributed R1 million to a
RAF which was not tax deductible.

He will be able to claim back the tax payable on R20 000 x 12 = R240 000
from his annuity against his over contributions to the RAF

There will be R840 000 remaining
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He retires from his RAF. He decides not to commute any lump sum and
purchases a living annuity. He draws R10 000 per month from the living
annuity

R240 000 + R120 000 = R 360 000 annuity income can be written off
against the remainder of the R840 000 every year until the full amount has
been written off
Should I take 1/3 as a lump sum?
Considerations
 Tax rates lower in
retirement than at
retirement
 Tax threshold
increases each year
Tax on pensions
Pension types – all taxed at marginal rates
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•
•
•
•
Guaranteed
With profit
Living annuities – (2.5% to 17.5%)
In fund or insurer
Underlying growth – no tax
Tax rebates
2013/2014 tax year
2014/2015 tax year
Primary rebate
R12 080
R12 726
Secondary rebate
(applicable to taxpayers
age 65 and over)
R6 750
R7110
Third rebate (applicable
to taxpayers age 75 and
over)
R2 250
R2 367
Tax thresholds
2013/2014 tax year
2014/15 tax year
Below age 65
R67 111
R70 700
Age 65 and over
R104 611
R110 200
Age 75 and over
R117 111
R123 350
Medical tax credits
Monthly medical tax credits for
taxpayers
2014/2015
Member
R257
First beneficiary
R257
Additional beneficiaries
R172
Family of four
R858
Family of four annual credit
R858 x 12 = R10 296
Operates like an additional rebate
25% under 65
33.3% over 65
1 March 2014 Medical Tax Credits
NO MORE DEDUCTIONS
TAX CREDITS ONLY
3 TIER ENQUIRY
With effect from 1 March 2014 under 65
Medical schemes fees tax credit – (per table)
1.
Additional medical expenses tax credit of
25% of:
Fees paid to medical scheme as exceeds 4
tax credit; and qualifying expenses
which exceed 7.5 %of taxable income
x the medical schemes fees
Example under 65
Mr X earns R1 million taxable income. His medical scheme
contribution for his family of 4 is R60 000. He has additional
qualifying expenses of R20 000.
1. Medical tax credit family of four = R 10 296
2. Medical aid contribution = R60 000 per year. 4 x R10 296 =
R 41 184
R60 000 – R41 184 = R18 816
Additional medical expenditure: R20 000
R20 000 + R18 816 = R38 816
7.5% of R1 million = R75 000
R75 000 is greater than R38 816
Total tax credit = R10 296
Person of 65 years and people with disabilities
Medical schemes fees tax credit – (per table)
Additional medical expenses tax credit, being
33.3% of the amount of fees paid to a medical scheme as exceeds
three times the amount of the medical schemes credit; and
33.3% of “qualifying medical expenditure
Example over 65
Medical aid contribution R3 000 per month. Husband and wife.
Additional medical expenditure R25 000 per year. Assume R514
per month credit = R 6168. (R 6168 x 3 = R 18 504)
R36000 – R18 504 = R17 496 x 33.3% = R5 826.16
+ R25 000 x 33.3% = R8 832
Total credits = R20 692
1. Medical scheme fees tax credit R6 168
2. Additional medical expenses tax credit R14 524 (R5 826 +
R8 832)
2013/14
2014/2015
Gross income
500 000
500 000
Less exemptions =
INCOME
nil
nil
less
DEDUCTIONS =
all medical expenditure
Eg : R 61000
nil
TAXABLE INCOME
439 000
500 000
Tax per tables
R 111 215
R132 566
Apply rebates
R 18 830
R 19 836
Apply medical credit
-
R 20 692
TAX PAYABLE
R 92 385
R 92 038
Age 65 medical
expenditure
Apply tables
Disability cover
Current legislation:
• Member monthly disability benefit premiums:
• No tax payable on premium. Tax deductible for employee
• Disability monthly income at claim stage:
• Taxable as income in the hands of the employee
New legislation: (Effective 1 March 2015)
Member monthly disability benefit premiums:
• Taxable as a fringe benefit in the hands of employee
Disability monthly income at claim stage:
•Paid out tax-free in the hands of the beneficiary (employee)
This means that everyone who has disability cover will take home a
few Rands less per month because the premium is taxable.
Unapproved life cover v approved life cover
Approved = held in retirement fund
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•
•
•
•
Contributions part of 27.5% = deductible
Payment to beneficiaries per discretion of trustees
Lump sums = taxable per death/retirement table
Annuities = taxable for beneficiaries
Not estate dutiable
Unapproved – taken out by employer on life of employee
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•
•
•
Employer pays premium
Employee taxed on premium as fringe benefit
Proceeds paid to chosen beneficiaries as lump sum – not taxable
Estate dutiable
Retirement annuity funds as a planning tool
 Proceeds of retirement funds not subject to Estate Duty
 In other words lump sums not subject to Estate Duty
 In other words annuities not subject to Estate Duty
 No CGT on proceeds
 Beneficiaries benefit from over contribution on lump sums if
member dies before full write off
 Contributions to RAF reduce Estate Duty in estate
 Can reduce estate dutiable value of estate at advanced age
Example: Contributing more
Mr X has R5 million in a bank account. Living on
interest. On death, depending on other assets it is
possibly estate dutiable. He contributes the full amount
into a RAF. He dies before retiring and before it has
been written off. At date of death it increases to
R5 500 000.
On the death of a member the R5 million is taxed as if it
had accrued to him immediately before he died if the
beneficiary takes the amount in cash. R5 million would
be tax free. R500 000 would be taxed on the
retirement table.
Example: Contributing more – living annuity
If the member had retired from the RAF and
purchased a living annuity with the R5 500 000 and
then died. The beneficiary would be able to take the
cash value of the living annuity as a lump sum or has
the right to purchase a compulsory annuity.
Any lump sum would similarly be tax free up to the
non deducted amount of R5million. R500 000 should
be used to purchase an annuity to avoid taxation of
the lump sum. The beneficiary can now repeat the
process and take out an RAF and buy an annuity and
then write off the contribution against annuity income.
Should I have after tax or pre-tax savings?
 Need a combination
 Pension funds excellent springboard
 Usually need a top up
 Pre-tax – usually taxable in retirement
 Post-tax – usually no tax or low tax in retirement
 Can get optimum income by combining strategies
Type of
investment
CGT
Dividend
Withholding Tax
Income
Small print
New tax
incentivised
savings product
No
No
No
R30 000 per year.
Lifetime R500 000
Endowments
Effective 10%
15%
30%
Paid by insurer
Unit Trusts
33.3% (13,3%)
15%
Marginal rates
High liquidity
Rentals
On sale of property
No
33.3% (13.3%)
Marginal rates
deductible
expenses
Transfer Duty, low
liquidity
Interest
No
No
Marginal rates
R23 800/ R34 500
Retail savings
bond
No
No
Same
Same
Voluntary annuity No
No
Small portion
taxable
Dependant on
rates
Shares
33.3 % (13.3%)
15%
No
Larger amounts
required
Loan accounts
from trusts
No
No
No
Structuring your retirement right for tax starts
long before retirement and is a marathon and
not a sprint and is fine tuned all along the way