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Lawrence, I’ve got an excellent tax tip for all your retiring clients!”

Look…when it comes to money making schemes I’m as gullible as the next guy. I couldn’t stop myself from uttering “What’s your tip? Tell me! Tell me!
With a twinkle in his eyes, Neville began to tell me his plan…

You know how 15% of your non retirement funding income is allowed as a deduction?”
Yes…?” I responded, slightly puzzled.

Well what if you took the taxable portion of your one-third (of your pension fund) and then invested that into your RA (retirement annuity)? So you end up being taxed on the withdrawal BUT…you claim the investment as a tax deduction against your other income. That way you get your full one-third out with little or almost zero tax!

Ah, come on Neville, you don’t believe that do you?
I’m not kidding…I plan on taking the full one-third of my RA. The tax-free portion I’ll keep (Which is R315, 000 for the 2011/12 tax year!), and the balance of my one-third (R60, 000 in Neville’s case!) I’ll invest into my RA after paying the tax on it. Then I’m going to claim that as an income tax deduction.

So what do you think?
It makes sense right…invest a lumpsum on which you paid tax into an investment where you can claim a tax deduction?

Here’s how Neville’s scheme worked:

  • Taxable portion of one-third taken in cash – R60, 000
  • Tax payable on that (R60, 000 x 18%) – R10, 800
  • Amount after tax (R60, 000 – R10, 800) – R49, 200
  • Taxable income – R300, 000
  • Tax payable on R300, 000 with no allowable deductions (2011/12 tax year) – R67, 750
  • Tax payable on R300, 000 with a 15% RA deduction (2011/12 tax year) – R54, 250
  • Tax saving with the retirement annuity – R13, 500

Neville’s plan nets him a tidy profit of R2, 700 in tax savings (R13, 500 – R10, 800)!

Now, if Neville had been so fortunate as to retire prior to March 2007 then this might have worked to some extent.
But after March 2007 the tax rules were amended to exclude retirement fund lump sum benefits when calculating this 15%.
The taxman reasoned that any lump sum received from a pension or provident fund was not actually‘income’.

So there, in a nutshell, you have it – one myth completely busted.
As for Neville …well, let’s just say he’s still not speaking to me!

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Until next time.

The InsuranceFundi Team


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