What is the sequence of events when retiring?

Dear Reader,

At retirement, the lump sum that you withdraw from your retirement fund is taxed as per the retirement tax tables. The total lump sum is taxed, not only the ‘growth’ portion. The tax is deducted before you receive the payout. The tax rates and corresponding values are shown below.

Source: Sars

Regarding the lump sum withdrawal, there are two factors to be aware of when applying the retirement tax tables to determine the tax payable on this:

• ‘Non-deductible retirement fund contributions’, and
• ‘Previous retirement fund withdrawals’.

Non-deductible contributions are those that you have previously made to a retirement fund but which did not qualify for a tax deduction. These contributions are then added to your tax-free portion. So it is possible that your tax-free portion is more than R500 000.

Previous retirement fund withdrawals refer to any withdrawals that you made from provident or pension funds prior to your retirement. These withdrawals will need to be accounted for and will impact the tax payable on your lump sum withdrawal at retirement.

After withdrawing the lump sum, the balance of your retirement fund may be used to purchase a life annuity or to invest in a living annuity. The regular income that you receive from the life or living annuity is taxed as per the individual tax tables. That is, the income that you receive from your life or living annuity is taxed in the same way your employment income was taxed prior to retirement. Again, here too, the total income is taxed and not only the ‘growth’ portion.

The tax benefit of being 65 years of age is that the tax threshold increases. Currently, for individuals 65 and older, the first R141 250 income per year is tax-free.

In most instances the product provider is required to deduct tax on your behalf before paying out the regular income, so you would receive an after-tax income.

If you are receiving more than one source of income, it would be useful to determine the correct tax rate to be used and to provide this information to the product provider so you don’t end up owing the South African Revenue Service (Sars) more than you expect at the end of the tax year.

On a retirement fund value of R6 million, one-third would equal R2 million. If we assume that there are no non-deductible contributions and that no prior retirement fund withdrawals were made, we can then apply the retirement fund tax table to determine the tax payable. The total tax payable would be R472 500. The after-tax lump sum that you would receive would be R1 527 500.

There are many aspects of post-retirement planning that need attention when structuring an optimal plan. Two aspects that I would like to highlight are the annuity options and minimising tax. As you can see, the tax on a lump sum withdrawal of R2 million is significant. During the planning process, consider all avenues and seek professional advice to minimise tax.

It is imperative that you understand the rules and the pros and cons of the different annuity products before proceeding with one. It is also possible to opt for a combination of annuity products, and this is something to consider depending on your objectives.

Ultimately, post-retirement planning requires time and attention. Start the planning process in advance so you have time to gather information and make an informed decision.