By Maria Smit*.Thinking about retirement is something most of us put off. It's not because we don't care. Often, it’s that as soon as you start looking into it, you're met with numbers, rules and jargon that feel like they were written for accountants, not for you. It’s human nature to either do nothing and hope for the best when you don't understand how something works, or you take a wild guess about what you should be doing. Either way, the worry doesn't disappear. It just sits there quietly, and it can end up costing you money. I'm not going to pretend you need to become a tax expert. But there are a couple of things about how your retirement money is taxed that surprise a lot of people, and knowing this can change the decisions you make, sometimes significantly. How much lump sum should you take?The first thing to know is that when you retire, you’re allowed withdraw a tax-free lump sum from your retirement savings. The first R550,000 you withdraw is completely free of tax. There's no downside to using this and it's money you're entitled to, so I so no reason to leave it unclaimed. Beyond that, SARS taxes the next R220,000, up to a total of R770,000, at a flat rate of 18%, paid once, upfront. Here's the part that surprises people. It’s more tax efficient to take this option than leaving it in your living annuity and drawing it as income instead. The reason is that this income will be taxed at your normal marginal rate every year, which for most readers here will be higher than the 18% rate offered by SARS. There’s one important consideration here: you only pay tax when you draw from your investment savings. So, if you’re able to hold onto the R220,000 instead of drawing it at retirement, that could grow in value over time and possibly offset how much you lose to tax. I suggest that it's worth running the actual numbers for your own situation so that you can make an informed decision rather than guessing. Should you contribute more than R430,000?One of the many changes to tax thresholds announced in this year’s Budget was an increase in the cap on contributions to retirement annuities to R430,000 a year. The tax benefit is that any contributions to approved retirement annuities and funds are subtracted from your annual income and you’re taxed on the remainder. But what if you’re able to save more than this limit? This is what's called a disallowed contribution, which sounds worse than it is. It simply means you’ve maxed out your tax allowance so these amounts are not deducted from your annual income when calculating your tax. The good news is that if you don’t reach the R430,000 limit in following years, your earlier extra contributions are then allocated to that year’s allowance. Even better, those extra contributions aren't lost at retirement either. You can set them off against the tax on your retirement lump sum, and against the tax on your annuity income as you draw it. Either way, SARS already knows you never claimed a deduction on that money, so it comes out tax-free when you finally receive it. This isn't a one-size-fits-all decisionIt’s important to recognise that neither of these approaches is set in stone. What works depends on your income, your tax bracket, how much liquidity you need along the way, and what you're actually trying to achieve with your money. That's exactly the kind of decision worth working through with your adviser, using your own numbers, not a rule of thumb. And that's really the message here. Don't get so caught up in chasing the perfect number or the perfect strategy that you lose sight of the one habit that matters most: contributing regularly, and staying consistent, year after year. Get that right, and the rest is detail you can work through when you get there..* Maria Smit CFP® Professional is an advisor at Brenthurst Pretoria maria@brenthurstwealth.co.za
