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SME.TAX Retirement Annuity

Retirement Annuity

Understanding your benefits before retirement.

When an individual approaches retirement, they generally have two options available to them, (1) retire and access their retirement benefit as a cash benefit or (2) annuitize their benefit and receive an income for the remainder of their lives.

Most times a combination of the two is utilized. If the individual has never accessed any form of retirement savings, they will have an amount of R500, 000 which is free of tax. Thereafter the tax increases on a sliding scale.

Often in family businesses, spouses, very rarely have any retirement savings. In instances such as this, an individual who is over the age of 55 can contribute to a retirement annuity and enjoy the following benefits.

  • Minimise taxable income,
  • make use of their lifetime allowance of R500,000 and,
  • withdraw the benefit a week later.

An example:

  • Mrs. A (aged 55) has never contributed to any form of retirement annuity. She currently earns R400,000. By adding R100, 000 into an RA she can reduce her taxable income to R300,000.
  • Once the money is invested, she completes a retirement benefits form and requests the cash benefit.
  • A week later the R100,000 is returned to Mrs. A and she’s reduced her taxable income by R100,000.

Any RA over the value of R247,500 must annuitize 2/3rd of the benefit. So, contributions to an RA to use the above example must be below this threshold. You can do this over a period of 5 years whereby each year you reduce your taxable income by R100k.

For high-net-worth clients, it is a popular consideration to place money into retirement annuities. The client can carry forward over contributions and the funds inside a retirement annuity fall outside of the deceased estate and as a result, do not attract estate duty. Upon the death of the client, his nominated beneficiaries can choose to receive an income for life or access the funds (taxed in the hands of the deceased)

An example:

Mr. X invests R10, 000, 000 into a RA, he receives a tax benefit that will carry on until depleted. He immediately converts the retirement annuity into a living annuity. He can receive an income and on death, his beneficiaries can continue to receive an income. R10, 000, 000 – R3, 500, 000 (abatement) *20% = R1, 300, 000 estate duty saving.

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