Retirement and tax – what you need to know: Part 1

 

Tax laws are constantly changing, and these changes can affect your retirement savings. While you need to consider the impact of tax when planning your retirement savings strategy, it shouldn’t be your primary concern. Here’s Part 1 of a handy guide.

Tax is certain, and there's no avoiding it. That said, it needs to be factored in both while saving for retirement, and during retirement, given the different tax treatment of those two scenarios.

Broadly speaking, the taxation process can be summed up as "exempt-exempt-tax", consistent with regulations in many countries globally. You are exempt from tax on contributions made while saving for retirement (up to certain limits), and you are exempt from gains on the investments while you are saving, but you are subject to income tax upon retirement as you draw down your savings.

Retirement savings vehicles

The key retirement savings vehicles are retirement annuities and pension or provident funds. The main difference between these products is that the latter are employer-provided and are typically mandated in most large businesses. Retirement annuities are typically used by self-employed individuals, employees in organisations that don’t offer a pension or provident fund, and those who want to increase their retirement savings.

The main benefits of retirement annuities are that you are able to contribute to as many of them as you wish, you can stop contributing whenever you want, and they are transferable. There is additional flexibility in that lump-sum retirement annuities are available. This is a tax-efficient way to house any excess savings, as you are able to use the lump-sum amount to reduce your income tax liability in that year.

The new Taxation Laws Amendment Act

The signing into law of the Taxation Laws Amendment Act (2015) and Tax Administration Laws Amendment Act (2015) by former President Jacob Zuma, which came into effect on 1 March this year, has prompted many questions from those who are saving for retirement through retirement annuities, pensions and provident funds.

In short, the Act ensures that the tax benefits of contributions to provident funds, pension funds and retirement annuities are now on an equal footing. (See our Q&A for more details on how the new Act will affect you.)

It is also important to note that most people currently saving for retirement will be unaffected or better off under the changes. High-income earners are likely to be the most affected by the changes.

How the Act affects you: before retirement

The tax deduction increases from 15% to 27.5% of income, up to a maximum of R350 000 annually, on contributions made towards structured retirement savings, and now applies across the board, in other words, to provident funds, pension funds and retirement annuities.

The distinction between retirement funding and non-retirement funding income has also been removed. That means all clients who were members of a pension or provident fund, and can now top-up their retirement savings to the limit of 27.5% by taking out a retirement annuity.

And with effect from 1 March, only employees are able to claim contributions, regardless of whether they actually made them (companies will often contribute to an employee’s pension).

How the Act affects you: after retirement

The new laws mean that the rules governing provident funds will, in effect, change to the same as those governing pension funds.

Provident fund members will now only be able to withdraw one-third of their savings at retirement, and they will be required to purchase an annuity with the remaining two-thirds. Effectively, one could argue that the government is looking to help protect retirees by enforcing compulsory preservation and making it impossible for hard-earned savings to be withdrawn in a lump sum.

To learn the following:

  • The current tax rates for lump sum withdrawals
  • Important exceptions to annuity rules
  • How your annuity is taxed
  • Whether early withdrawals are still possible
  • More about tax-free savings accounts     
Read part 2 of this handy guide to retirement and tax.
 
 

Create and build wealth with our flexible investment plans

Our unique shared-value model rewards you for taking responsibility for your financial future. Our investment plans have unique benefits that reward you for saving for longer, investing more, and getting healthier. They include:

  • Discovery BoostersTM - which grow your investment
  • Discovery Fee OptimisersTM - which reduce fees on your investment
  • Discovery ProtectorsTM - which give you peace of mind by protecting your investment

To take advantage of these innovative products, find out more here or speak to your financial adviser today.

Get up to 50% of your premiums back in cash for living a healthier life

By simply linking your Discovery Life Plan with your other Discovery products, you can receive a percentage of your premiums back every five years for managing your health and wellness. Integration allows you to receive up to 50% of your premiums back every five years

Related articles

 
 
 
 
 
 

Now is the time to recheck your estate

In light of the 2018 Budget Speech, which proposed to increase tax duty from 20% to 25% on the excess duty of estates worth R30-million and more, people need to ask fundamental questions about the legacy they will leave behind.

 
 
 
 
 
 

Planning pays off for Pretoria couple

When Zybrand Lombaard set up a private business, he and his wife sat down with their long-time broker in late 2007 to adjust and expand their Discovery policies. When Zybrand’s business kicked off in mid-2008, they had one less thing to worry about.

 
 
 
 
 
 

Can you afford to give your child an education?

While every South African child has a constitutional right to a basic education, there are still many challenges that prevent equal access for all, especially in tertiary and higher education. Nearly a quarter of learners leave school early or don’t attend a tertiary institution because they just don’t have the money to study.

Log in

Please click here to login into Discovery Digital Id

Please click here to login into Discovery Digital Id