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RETIREMENT AND TAX

You may think that, at least, when you retire you will finally be able to stop worrying about paying tax.

We have some bad news for you…

Even if you are no longer working, but do receive annuity income, you might still have to carry on paying tax, depending on how much you receive.

If you are receiving above a particular threshold then every year you will be required to declare income from your annuity (and any other income like investments) on your tax return. Especially if you decide to take a large lump sum payout from your retirement fund you will also be in line to pay tax.

Let’s look at both these situations and see what tax may apply.

LUMP SUM PAYOUTS FROM YOUR PENSION

If you have retired and want to take out a portion of your retirement interest as a lump sum payment then you are able to take 1/3rd of the interest in that fund.

The remaining 2/3rd will be paid out in the form of an annuity (a regular pension over time).

Note: If however, if your total interest in the fund is less than R247 500, then you can take the full retirement interest as a lump sum in one go.

For most people when you retire and have a provident fund (or provident preservation fund) your retirement interest is usually paid out as a lump sum (unless the rules of your fund only allows for annuity payments).

If you have already retired and get an annuity income (from a living annuity arrangement) then you are allowed to draw the amount as a lump sum, if the full remaining value of the assets ends up being less than R125 000.

Tax on these funds is calculated on the gross retirement fund lump sum benefit (after taking a few past tax things into account).

THE RETIREMENT FUND LUMP SUM BENEFIT FOR THE 2020 TAX YEAR IS TAXED WHEN YOU RETIRE USING THESE SPECIAL TAX RATES:

Note: ALL lump sums received from a retirement fund, whether as a result of retirement or maybe as part of a severance benefit are taxed on a cumulative basis. This means that when you eventually retire, the total value of all the lump sum benefits received (after 1 October 2007), will be taken into account when working out the tax payable on your current retirement fund lump sum benefit.

ANNUITY PAYOUTS FROM YOUR PENSION

As mentioned earlier, you may have to pay tax if you are getting a big enough pension payout monthly (worked out on a total annual figure).

It all depends on if the payout is more than a particular threshold amount. You may be wondering what those threshold amounts are. Here is a quick look at the recent threshold amounts are for different
age groups:

For the 2021 year of assessment
(1 March 2021 till 28 February 2022):

  • Person below the age of 65 – R87 300 per annum
  • Person aged 65 and above but not yet 75 – R135 150
  • Person aged 75 and above – R151 100.

For the 2021 year of assessment
(1 March 2020 till 28 February 2021):

  • Person below the age of 65 – R83 100 per annum
  • Person aged 65 and above but not yet 75 – R128 650
  • Person aged 75 and above – R143 850.

NEED MORE INFO?

If you are fortunate enough to be getting a healthy retirement annuity or have an amount that you wish to draw as a lump sum then do not forget that SARS wants their cut. If you are feeling a bit confused about all this then it is often a good idea to talk to your Debt Counsellor or a tax professional who can guide you to where to find the most up-to-date info.

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