Retirement 101: How the taxman assists you with your retirement

There are three main retirement vehicles used by South African taxpayers. They are pension funds, provident funds and retirement annuity funds. These funds primarily invest in the stock market, property market and bond market as it has been proven over time that these give the best returns. These funds are also subject to tax concessions to ensure better retirement returns for individuals. We will look at how contributions to retirement funds are taxed during our working lives and how they are taxed when we retire. In looking at these examples, it is worth noting that the tax authorities provide considerable assistance in making provision for retirement. How the tax treatment of contributions made by employer and employee varies by different fund g_01 * RFE = retirement funding employment income which consists of salary less bonus and travel allowance. Any amounts not deductible may not be carried forward to future years but may be set off against retirement lump-sum payments. ** NRFE = non-retirement funding employment income would be travel allowance, bonus, annuities and interest received (less the R22,800 exemption for interest income, plus other exempt income). Any amounts not deductible may be carried forward to future years and may be set off against retirement lump-sum payments. Notes: 1. You can only belong to a pension or provident fund via your employer. 2. RAs on the other hand are taken out by you in your own capacity. 3. Although the employee gets no tax relief from provident fund contributions, such contributions are set off against any lump-sum payments on retirement. 4. It is possible to make “top-up” payments to a pension fund or RA fund at end February if you have not maximised your allowable contributions. As this is effectively funded by SARS up to 40% (depending on your tax rate), it makes sense to make use of this facility. 5. There is nothing to stop an individual using a combination of these products. 6. The 20% limits referred to in the table under “employer” for pension funds and provident funds are the total amount the employer can deduct. Thus the tax authorities give substantial concessions to encourage individuals to save for their retirement – not only can employers deduct up to 20% of salary towards retirement but it is not taxed as a fringe benefit in the employee’s hands. In addition, individuals get tax breaks for their own contributions towards retirement savings. This is a great incentive to save for retirement. Taxation of withdrawals When we reach retirement we are allowed to withdraw one third of our retirement savings at low tax rates. Although Treasury would prefer us to withdraw less and use more to buy an annuity, this tax subsidy recognises that in reality at retirement age people often need access to finance for such things as acquiring a place in a retirement home. The tax rates for the withdrawal are: g_02 In addition, we can at this stage set off any amounts we paid into retirement funds that were not allowed at the time because they were in excess of the allowed deductions per the above table. Let’s say we are entitled to a R1 million withdrawal (one third of the value of our retirement funding) and we have R700,000 of premiums paid to the fund but not allowed at the time as a tax deduction. The tax paid would be nil. g_03 Thus, at retirement age there is also favourable tax treatment on withdrawals to give individuals flexibility. Remember the amount we get paid as a monthly pension will be taxable and thus when planning for your retirement ensure that you take this into account. Speak to an expert about the options to choose for your retirement. The tax authorities give you powerful incentives which will assist in your retirement. © DotNews, 2005-2013. This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein.  Always contact your financial adviser for specific and detailed advice.

This entry was posted in Uncategorized. Bookmark the permalink.