Tax and retirement

Government uses the tax system to encourage you to save for retirement and to discourage you from cashing in your savings before you retire, Jenny Gordon, Alexander Forbes’s head of retail legal advice, says. This is the second article in a series of reports on the Personal Finance/Alexander Forbes Ready Set Retire conferences that were held around South Africa in March.
 
You must take tax into consideration when you plan for retirement, but tax should not be the overriding consideration, Jenny Gordon says.
“Tax is a tool you use. Where possible, you take advantage of the tax opportunities,” she says.
The state provides a number of tax incentives to encourage saving for retirement and help you in retirement, Gordon says.
She says the retirement tax structure is based on three legs: exempt, exempt, taxed.
* Exempt. You can deduct – subject to certain limits – from your income contributions made to a tax-incentivised retirement product, such as an occupational retirement fund or a retirement annuity fund.
* Exempt. You do not pay capital gains tax (CGT), dividends withholding tax or income tax on the investment growth earned on savings in a retirement fund.
* Taxed. You pay tax, at your marginal rate of income tax, on your pension.
However, Gordon says, retirees still enjoy tax breaks, including:
Your marginal tax rate in retirement is usually lower than the rate you were on while you were working. As a result, you will pay less tax on every rand you receive as a pension.
* There is no CGT, dividends withholding tax or income tax on the growth in a living annuity investment portfolio bought with retirement fund savings.
* At retirement, you can withdraw up to R500 000 tax-free from your retirement savings.
* You receive tax rebates in addition to the primary rebate (R12 726 in the 2014/15 tax year) that applies to all taxpayers. At age 65, you are entitled to the secondary rebate (R7 110), and at age 75 you receive the tertiary rebate (R2 367).
* Amounts in a tax-incentivised savings vehicle do not form part of your estate when estate duty or CGT is calculated. (This concession also applies before retirement.)
* Medical tax credit. Taxpayers over 65 are subject to the medical tax credits from this tax year. Medical tax credits operate like an additional rebate, Gordon says.

All medical scheme members are entitled to deduct medical scheme contributions up to R257 a month each for the main member and the first dependant and R172 a month for each additional dependant. In addition, people over 65 are entitled to a credit of 33.3 percent of medical contributions above a threshold, plus unrecovered expenditure.

Gordon says the tax incentives are there to encourage you to save for retirement. “The state wants to make sure you do not live on the state in retirement.”
However, the tax incentives are not unlimited. “The state wants us to have sufficient income in retirement – not a lavish retirement.”
As a result of the limits, your retirement-saving strategy must include products apart from retirement funds, Gordon says.

Most people believe that contributions to an occupational retirement fund will provide sufficient savings for retirement, she says.
“While a pension fund provided by your employer is an excellent springboard, it is unlikely to give you sufficient money for a financially secure retirement.”
People often aren’t concerned about saving, or saving additional amounts outside of a retirement fund, until they are older. By then, you might be using all the tax incentives for saving in a retirement fund. To reach your savings goal, you will have to consider products that don’t provide tax deductions on the contributions but offer lower rates of tax on the income you receive in retirement, Gordon says.

Products are affected in different ways by income tax, CGT, dividends tax and estate duty. You need to find out how tax will affect the net return on the investment.
The tax could be payable in your hands when you receive a benefit, as is the case with unit trust funds, or be tax-free in your hands, as with an endowment policy where the life assurance company pays the tax on your behalf.

Gordon says that government’s proposed tax-incentivised savings product will be a good option, because none of the returns will be taxed. However, there will be a limit on the contributions: R30 000 a year or R500 000 over your lifetime.
“For most of us, tax is a difficult concept to get our heads around. We are not always on top of the latest tax implications and how these may affect our financial plans.”
As a result, it is important regularly to obtain financial advice that takes into account the latest tax laws and regulations, she says. Click link to read more

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