3 ways to optimise your tax at retirement

*This content is brought to you by Brenthurst Wealth

By Sonia du Plessis* and Ruan Breed**

A common mistake that can lead to some unhappiness when you retire is not accounting for the taxes that are due when your work life ends. As we’ll explain below, various taxes are due at and after retirement, so it helps to know what to expect when the big day arrives.

Fortunately, the SA Revenue Service (SARS) offers a tax simulation tool that can help you anticipate your tax obligations and avoid any surprises. This tool helps you to get an idea of what the tax implications when withdrawing a cash lump sum from your retirement fund.

This crucial calculation is based not only on your funds at retirement, but also past ‘withdrawals’ you’ve made when not investing your accumulated pension savings when you change jobs. It’s unfortunately quite common to hear of people using their pension savings when changing jobs as a cash boost that isn’t always reinvested, as it should be.

Anyhow, you can request a tax simulation by logging into your SARS e-filing profile or through the investment company managing your retirement fund. This exercise will help you be better prepared and informed before submitting your final retirement paperwork.

This tool will also alert you to any outstanding amounts you owe from your pension benefits, which SARS will deduct when calculating your tax obligation at retirement. Which is another reason to stay on top of your tax matters while still earning a salary because it’s easier to absorb financial shocks than when you’re living on your retirement savings.

With this in mind, here are three ways you can optimise your tax at retirement:

1. Plan ahead to avoid surprises

One of the most effective ways to minimise tax burdens is to plan ahead, which applies whether you’re using a pension, pension preservation, provident, provident preservation or retirement annuity (RA) fund.

And one of the most important pieces of advice we can give about this is to be aware that actions today have consequences in the future. So, when changing jobs, avoid withdrawing the retirement funds from your pension because these withdrawals are added to calculate your R500,000 tax-free lump sum withdrawal.

This means that if you’ve not reinvested your saved pension funds when changing jobs, then some – or all – of your R550,000 tax-free allowance won’t be available to you when you retire.

Here’s a breakdown of the tax rates that get applied when you make a lump sum withdrawal at retirement:

2. Contribute to retirement products

You can already optimise your tax position before retirement by making full use of the tax benefits you get from saving in a registered retirement product. This could be a company pension or provident fund or RAs, unit trusts and other products that comply with the Pension Funds Act.

The benefit amounts to having all your contributions – limited to 27.5% of your salary or taxable income and an annual sum of R350,000 – are deducted from your annual tax bill.

These are considerable savings that help encourage proper retirement saving, and benefit you in the long run because of the tax deductions.

3. Split income and assets between spouses

When you retire, a simple and effective way to reduce tax burdens is for spouses to split income and assets between them. This makes sense because you aren’t taxed on donations between spouses.

We suggest you engage with a suitably qualified financial consultant to figure out the details because your case will be different from anyone else’s. 

Proper planning will benefit you in the long run because being retired doesn’t mean you’re now exempt from taxes. You continue to pay tax on the income you’re earning from your living or life annuity. 

As you can see, you do get some relief from higher tax thresholds, but chances are that you’ll still be liable for some tax. Which is why splitting assets with your spouse is a wise move.

And remember, living annuities are tax-efficient structures because all growth in the investment is free from capital gains tax, interest, and dividend tax. They’re also exempt from estate duty and executor’s fees. 

Another living annuity benefit worth bearing in mind is that you can nominate beneficiaries (like your spouse) of your living annuity so that they have access to funds while your estate is being wound up.

Hopefully these examples of how you can make your retirement funds last longer will give even non-financially minded savers to recognise that planning for your pension is not a ‘set it and forget it’ scenario.

Apart from doing annual reviews to check if you’re still on track, managing your tax obligations is a crucial part of your retirement planning process. This doesn’t have to be a complex process, but speaking to an advisor will help to clarify your situation and get your questions answered.

Avoiding unwanted tax surprises is something you can and should be planning for. Speak to us if you have any questions, we’re always happy to help and inform.

* Sonia du Plessis, CFP®, is Head of Brenthurst Wealth Stellenbosch. 

* Ruan Breed is a financial advisor at Brenthurst Stellenbosch and George.

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