SARS closing retirement lump sum loophole

By Kristin Putter*

It’s not uncommon for South Africans to accumulate more than one living annuity over the years – because you changed jobs, moved advisers, or simply never got round to consolidating. If this is you, then changes proposed by SARS earlier this year might affect you.

For years, retirees with several small living annuities with the same insurer were able to cash out each one separately, once it dropped below a set threshold. But SARS now wants to handle things differently by lumping your combined living annuities into one sum.

Slipping under the tax radar

The appeal of a living annuity is that it pays you a defined income every month in retirement. How much you get depends on how much you've saved and how much you choose to draw, and like a salary it's taxed every month before it lands in your account.

But apart from these monthly payments, you can't simply dip into the funds sitting in your living annuity. Except, of course, when the remaining balance falls below a certain threshold, which is now R150 000.

The reason is simple: a small living annuity ends up costing you more in fees and hassle than it's worth. So SARS lets you take what's left as a single lump sum once the balance drops below the threshold.

Here's the part that matters for tax. That lump sum isn't taxed the same way as your monthly income. It's taxed once, under far friendlier rules, with a chunk of it possibly being tax-free. Draw the same money out as income over the years instead, and it gets taxed at your normal rate, year after year.

The thing is that SARS has picked up that some retirees hold several annuities with the same insurer, each comfortably under R150 000, and have been cashing each one individually. 

Add them together, though, and the total can run well past what the threshold was ever meant to allow, letting money that should have been taxed as income for years slip out as one lightly-taxed lump sum instead.

It might feel odd that something you've been doing quite legitimately for years is suddenly under the spotlight. But the change isn't about penalising how you've planned. It's about closing a gap in how the rule was written.

Say you hold three living annuities with the same insurer, worth R145 000, R90 000 and R75 000 respectively. Looked at individually, every one of them falls under the R150 000 mark. Add them together and you're sitting at R310 000. Under the proposed change, it's that combined figure SARS would test against the threshold, not each policy on its own.

Why the insurer you use matters

This doesn't mean everything you hold gets lumped together. The aggregation only applies to annuities held with the same insurer or the same fund.

So if you hold a R110 000 annuity and a R60 000 annuity with one insurer, that's R170 000 combined, which is over the R150 000 threshold. A separate R100 000 annuity you hold with a different insurer stands on its own, and isn't added to the first two. Where you've spread your annuities across providers, it's each provider's total that counts, not everything you hold added up.

None of this is law yet. It's a proposal in the draft Taxation Laws Amendment Bill, open for public comment until 28 August. The wording could still change before it's finalised, and exactly when it would take effect still needs to be settled.

Even so, it's worth using this as a prompt to take stock rather than wait and see. If you're planning to consolidate or cash out any living annuities, especially if you hold more than one with the same provider, add up what they come to together. Checking each one against R150 000 on its own could give you the wrong answer.

You don't need to make any decisions today. But if you've got more than one living annuity sitting with the same insurer, now is the right time to get a clear picture of where you stand, while there's still room to plan around it rather than react to it later.

If that sounds like your situation, get in touch and we'll go through your policies together. We'll work out what, if anything, needs to change before the rule becomes final, so you're acting on a clear plan rather than reacting to a headline.

*Kristin Putter is a paraplanner to Marise Reinach CFP® & Charize Beukes CFP®   at Brenthurst Wealth Pretoria. kristin@brenthurstwealth.co.za