Tax Tips for Pensioners

Retirement planning can be a minefield. Not only do you need to start thinking about lifestyle changes but preparing for a sound financial retirement is challenging. Research shows that most people start thinking about their retirement only as from the age of 50, but if you want to maximise your income and minimise your tax in retirement, you are advised to start planning well before you retire.

Morné Janse van Rensburg, manager at Hobbs Sinclair and Managing Director of Bannister Trust, says that knowing the tax benefits available to retired individuals 65 years and older can be very valuable, especially considering the possible length of some people’s retirement. “The impact of taxes is just as important to consider now as it was when saving for retirement,” stresses Janse van Rensburg. “The good news is that at retirement there may be more options to increase your after-tax income.”

The South African Revenue Service along with government has over the years adjusted tax regulations to benefit retirees. Janse van Rensburg outlines how to make the most of what SARS has implemented.

Interest exemption

Individuals under the age of 65 years are entitled to a local interest exemption of R23 800 per tax year. For example, if you earned local interest of R50 000 during the 2019 tax year, the first R23 800 would be exempt and only the remaining R26,200 would be subject to Income Tax.

Once a taxpayer turns 65 the exemption amount increases to R34 500. In other words, a person over 65 can therefore receive interest of R2 875 per month tax-free (not including personal tax rebates).

When you withdraw your lump sum from your pension/retirement annuity fund or provident fund on retirement, it may be wise to take some of the funds and invest this in an interest-bearing account to utilise the interest exemption. In this way you can maximize your tax-free income after retirement.

• Increased tax threshold

In the 2019 tax year, the tax threshold for individuals younger than 65 is R78 150. This means that if an individual has taxable income of R78 150 or less then they will not pay any Income Tax. However, for individuals who are 65 years and older, this threshold increases to R121 000. This individual can, therefore, receive income of R10 083 per month and will not pay any Income Tax.

Furthermore, once a person reaches the age of 75 years and older, the threshold increases further to R135 300 (R11 275 per month).

• Additional medical tax credit

Individuals over the age of 65 are entitled to an additional medical expenses tax credit. This is calculated on a portion of the expenses that have been incurred but have not been covered/paid by the individual’s medical aid, i.e. they paid for the expenses themselves. Expenses such as doctors’ fees, medicine, optometrist fees, physiotherapist fees, nursing assistant fees and hospital fees may be claimed.

Other factors to consider:

• Monthly withdrawal from an investment portfolio

One of the best sources of income in retirement is withdrawing an income from your existing unit trust investment portfolio. Many taxpayers are not aware that SARS does not see these withdrawals as taxable income. For example, if you withdrew a monthly sum of R25 000 from your unit trust portfolio, the R25 000 is not included in your taxable income. You may be liable for Income tax on the capital gains, dividends or interest you receive from the portfolio; however, the tax on these is normally lower than what you would be taxed on ordinary income of R300 000 (R25 000 x 12) due to the available exemptions on these ‘passive’ incomes.

• Tax-free investments

Another source of tax-free income in retirement is to draw from a tax-free savings account. SARS introduced these accounts in 2015 to encourage more South African taxpayers to start saving. Currently, you can invest a maximum of R33 000 per tax year and a total over your lifetime of R500 000. Any interest earned will not be subject to Income Tax.

• Donations to a spouse

Donations between spouses are exempt from donations tax under section 56(1)(b) of the Income Tax Act. Despite the fact that this exemption is very useful when restructuring one’s personal estate and the resultant Estate Duty, many taxpayers are unaware of it.

•  Paying less by giving more

The estate of a deceased person is subject to 20% Estate Duty on the first R30 million of the dutiable amount of an estate and 25% on the amount exceeding that figure, after taking into account a deduction of R3.5 million against the net value of the estate. However, there are various deductions which can be used to reduce your Estate Duty. For example, the value of the deceased’s estate (and, therefore, the extent of the obligation to pay Estate Duty) may be reduced by the value of any bequest made to a PBO or PBO-registered charity.

• Timing

Choosing when to make withdrawals from your various investments in retirement could have adverse tax implications if not done in the correct manner or order. It is important to take the time to think about taxes and make a plan to manage withdrawals. Be sure to consult with a tax or financial adviser to determine the course of action that makes financial sense for you.