ONE ADVANTAGE OF OWNING A RETIREMENT ANNUITY

There’s very little an individual can claim from tax nowadays!

So what can you claim from tax?

In no particular order and depending on the type of income you receive:

• Contributions to a pension or provident fund
• Contributions to a retirement annuity
• Donations to approved public benefit organisations
• Legal expenses relating to your employment income
• Business travel deductions against car allowances
• Wear and tear on equipment used in the production of income
• Bad debts arising from employment

How much of your contribution towards a retirement fund is tax deductible?

In the good old days, the maximum deduction allowed was generally speaking 7,5% of retirement funding income towards a pension fund, and 15% of non-retirement funding income to a retirement annuity.

This all changed from 1 March 2016.
Amounts contributed towards pension, provident, and retirement annuity funds during the tax year are deductible by you as a member up to certain limits. Contributions made by your employer will be taxed as a fringe benefit in your hands. You will then be treated to have made this contribution and can deduct this as part of the limits provided.

The calculation works as follows:
Your deduction applies to the combined amount contributed towards a retirement fund (pension, provident and retirement annuity) and is limited to 27,5% of the greater of:

• Your remuneration for PAYE purposes, or
• Taxable income, but
• Limited to a maximum deduction of R350,000 per tax year

What’s the difference between remuneration and taxable income?

Take for example the guy who works as a full-time employee and who owns a rental property. In this case, his taxable income is higher than his salary at the company since he must declare:
• His annual remuneration at the company, plus
• His annual income from rent

What if your contribution towards a retirement fund is more than R350,000 per tax year?

All is not lost. The amount exceeding R350,000 is carried over to the next year and is included with next year’s contributions that can be deducted subject to the limit for that year. And so it rolls from year to year.

If he eventually retires, and there’s a contribution that he has not been able to deduct for tax purposes (i.e a disallowed contribution), let’s say an amount of R200,000 still outstanding, this R200,000 will be deducted from his cash lump sum taken at retirement, and the difference between the two will be his taxable lump sum. The taxable lump sum will then be taxed at the retirement tax table. Currently, the first tier of the retirement tax table provides that up to the first R500,000 may be taxed at 0%. This table applies cumulatively over your life time. Prior cash lump sums taken from retirement funds as well as severance benefits received as of certain specific dates will be taken into account as well and will impact the tax payable on the cash lump sum taken.

Here’s an example:
• Current fund value of his pension – R3 million
• One – third of his pension allowed in cash – R1 million
• Previously disallowed contribution to his retirement – R200,000
• Taxable lump sum = R1,000 000 – R200,000 = R800,000
• Assume there were no previous lump sums taken as of certain specific dates or severance benefits received

The R800,000 will be taxed in terms of the retirement tax table
And what if his one-third cash lump sum is not large enough to allow the full deduction?
In this instance, the balance of the disallowed contributions is offset against the tax payable on his monthly pension. Remember that the remaining two-thirds of his pension capital must be used to purchase an annuity income which is fully taxable.

The 27,5% tax deduction calculation works like this:
• Paul’s taxable income is R10,000 per month, or R120,000 per annum
• He may contribute 27,5% of that towards his retirement – R33,000 per annum that may be deductible for tax purposes
• He contributes R500 a month to the company provident fund and R1,000 per month to his retirement annuity
His total retirement contributions are:
– (R1,000 x 12) + (R500 x 12)
= R12,000 + R6,000
= R18,000

• His tax deduction works as follows:
– Annual income – R120,000
– Retirement fund deductions – R18,000 (27,5% x R120,000 = R33,000, but his deduction is limited to the amount actually contributed)
– Taxable income = R102,000
Instead of paying tax on R120,000 Paul now pays tax on R102,000

So what are the benefits?

1. More choice

Yes, many pension funds allow access to a wider range of funds than ever before, but many don’t, preferring to limit investment choices in order not to confuse employees. A retirement annuity offers the investor more discretion as to where to invest capital, and there are usually numerous fund options to choose from. Of course, financial advice to when deciding on which fund to choose from.

2. Staggered retirement
Paul may retire from his retirement annuity from age 55 onwards. He even may decide to continue with his retirement annuity and continue to contribute to his retirement annuity past the age of 55. These options are not currently available on pension or provident funds. Currently, retirees of these funds may elect to retire at any age subject to the rules of the specific and individual fund (and in line with the normal retirement ages provided for by the law). If the fund retirement age is 60 for example, Paul currently has no option – he must go, unless the specific fund rules state that the benefits can be retained in the fund without and further contributions being made.

3. More flexibility
A pension for provident fund might not offer you the option of increasing or decreasing your contribution towards the fund or you may be limited in the extent to which you are able to increase or decrease your contributions. A retirement annuity, if done correctly, will allow you to increase or decrease your contributions as your budget dictates, You will however need to look at the specific RA you are invested in.

Conclusion
No-one likes paying tax but we know it’s a necessary evil. Without taxes, society cannot operate. Granted, things are functioning right now as they should, but that doesn’t mean we can avoid paying tax. However, we can avoid overpaying on tax, and we’re certain that’s something you’d enjoy doing.

At the same time, the majority of South Africans are unprepared for retirement.
So what better way to prepare for retirement, than at the expense of the taxman?

Leave your details below and we will get an authorized Old Mutual consultant to call you back?

Until next time.

Old Mutual_Retirement Annuity

The InsuranceFundi Team

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