DANIEL BAINES: After retirement, taxman still takes a bite from your annuity
Many people contribute to a pension fund or retirement annuity, but few understand what happens to these savings when they reach retirement age
If you are saving in a pension fund, you may be wondering how you will be taxed on the amounts that you receive from your fund after you have retired. While many people contribute to a pension fund or retirement annuity while they are working, few people understand what happens to these savings when they reach retirement age.
Most people will take a portion of their retirement savings as a lump sum (this has certain tax implications) and will purchase a living annuity with the remainder of the funds.
If you have a retirement annuity or pension fund you can take only up to one-third of your savings as a lump sum upon retirement and are obliged to buy an annuity with the rest of the money.
Your retirement fund or retirement fund administrator will generally offer the service of setting up a guaranteed or living annuity for you after your retirement. An annuity pays you a monthly salary after retirement.
In a living annuity you need to get the investments and the income drawn correct to ensure that your retirement funds do not run out if you live a long time after retirement.
If you get more than one living annuity, you should ensure tax is withheld
There are, therefore, restrictions on the amount that you are able to withdraw from your living annuity; this is calculated on a percentage of the total funds in the living annuity.
A guaranteed annuity, on the other hand, provides you with a guaranteed income for life, but any capital that is left over upon your death will not pass to your heirs (unlike a living annuity).
Whether you opt for a living annuity or a guaranteed annuity, the tax implications for your monthly income are the same.
The tax that you pay on an annuity is calculated in a similar manner to your salary when you were working.
Persons over the age of 65 are, however, entitled to additional rebates, which results in a reduction of tax payable to the South African Revenue Service (Sars).
The amount of tax that you will pay is best illustrated by means of an example:
Receipt of monthly income from a living annuity after retirement:
- Monthly income from living annuity: R20,000;
- l Total annuity received for the tax year: R240,000;
- l Tax payable on this amount: R46,732;
- l Less primary rebate of R14,067 (the primary rebate is available to all individuals);
- l Less secondary rebate of R7,713 (the secondary rebate is available to all individuals who are 65 years of age by the end of the tax year);
- l Tax payable for the year: R24,952;
- l Monthly tax payable: R2,079.
In other words, you will receive an amount of R17,921 a month after tax (R20,000 minus R2,079).
This tax will be withheld by the institution paying the living annuity prior to it being paid to you, in the same way that pay as you earn tax was withheld when you were working.
A common error that retired people make when it comes to paying the right amount of tax is that they have living annuities from more than one institution.
However, as each of the annuities falls below the tax threshold (ie the amount of income you can receive before you are liable to pay tax - this is now R121,000 for persons 65 and over), no tax is withheld by the institution paying the living annuity.
If the combination of the two living annuities pushes you above the tax threshold, however, you will be obliged to pay tax.
If you receive more than one living annuity you should ensure the correct tax is withheld so you don't have to pay in when your tax is assessed.
Baines is the author of How to Get a Sars Refund and a tax consultant at Mazars