RAs re­main ‘a great es­tate-plan­ning tool’

Weekend Argus (Saturday Edition) - - PERSONALFINANCE - BRUCE CAMERON

Re­tire­ment an­nu­ities ( RAs) will re­main a great es­tate-plan­ning tool even once re­stric­tions on the taxd­e­ductibil­ity of con­tri­bu­tions are im­ple­mented, Jenny Gor­don, the head of re­tail le­gal sup­port at Alexan­der Forbes, says.

Some of the pro­vi­sions in the Tax­a­tion Laws Amend­ment Bill, which is be­fore Par­lia­ment, are de­signed to clamp down on wealthy peo­ple who over-con­trib­ute to re­tire­ment funds in or­der to re­duce their in­come tax and es­tate duty.

You can claim a tax de­duc­tion of up to 7.5 per­cent of your pen­sion­able in­come on an­nual con­tri­bu­tions to an oc­cu­pa­tional re­tire­ment fund and up to 15 per­cent of your tax­able in­come, less your pen­sion­able in­come, on con­tri­bu­tions to an RA fund.

Some wealthy peo­ple con­trib­ute more to an RA than the max­i­mum de­ductible con­tri­bu­tion of 15 per­cent of non- re­tire­ment- fund­ing in­come. Al­though the ex­cess amounts are not tax-de­ductible, they earn in­vest­ment re­turns that are not sub­ject to tax, and they can pass on the money in the RA to their ben­e­fi­cia­ries free of es­tate duty.

The amend­ment bill states that any re­tire­ment fund con­tri­bu­tion made from March 1 next year that does not qual­ify for a tax de­duc­tion will be in­cluded in the es­tate, for es­tate duty pur­poses, of peo­ple who die on or af­ter Jan­uary 1 next year.

Gor­don says the amend­ment does not ap­ply to con­tri­bu­tions that qual­ify for a tax de­duc­tion un­der the cur­rent tax regime or the new regime that is sched­uled to take ef­fect on March 1, 2016.

Un­der the new regime, an­nual con­tri­bu­tions to a re­tire­ment fund will be tax-de­ductible up to 27.5 per­cent of the higher of your re­mu­ner­a­tion or tax­able in­come, but with a cap of R350 000 a year.

Con­tri­bu­tions that do not qual­ify for a tax de­duc­tion can be rolled over to a fol­low­ing year, when you can claim them if you do not use your full tax de­duc­tion in that year.

Gor­don says the re­stric­tion on the es­tate duty ex­emp­tion for RA con­tri­bu­tions ap­plies to so-called “death bed” lump- sum con­tri­bu­tions made with af­ter-tax money.

On your death, your ben­e­fi­cia­ries can take the full ben­e­fit (amount saved in the RA) as a lump sum or an an­nu­ity (in­come or pen­sion).

If the ben­e­fit is taken as an an­nu­ity, the in­come is taxed at the re­cip­i­ent’s mar­ginal rate of in­come tax.

If the ben­e­fit is taken as a lump sum, the amount is deemed to have ac­crued to the de­ceased fund mem­ber on the day be­fore his or her death, and it is taxed in the hands of the de­ceased as if the mem­ber had re­tired from the fund. As a re­sult, the first R500 000 is tax- free, an amount be­tween R500 001 and R700 000 is taxed at 18 per­cent, an amount be­tween R700 001 and R1 050 000 is taxed at 27 per­cent, and any amount over R1 050 001 is taxed at 36 per­cent.

Gor­don says there are many rea­sons to use RAs as an es­tateplan­ning tool. Th­ese in­clude:

◆ Sav­ings in an RA do not form part of your es­tate if you are de­clared in­sol­vent and they are largely pro­tected from your cred­i­tors, be­cause there are only lim­ited cir­cum­stances in which de­duc­tions can be made from your RA sav­ings.

Most small busi­ness own­ers con­sider their busi­ness to be their re­tire­ment plan with­out con­sid­er­ing the risks of plac­ing all their eggs in one pre­car­i­ous bas­ket. Over-fund­ing an RA might be a good long-term re­tire­ment strat­egy.

◆ You must use at least twothirds of the ben­e­fits of an RA to buy ei­ther a liv­ing an­nu­ity or a guar­an­teed an­nu­ity.

An ad­van­tage of a liv­ing an­nu­ity over other in­come-pro­duc­ing in­vest­ments is that the in­vest­ment growth is not sub­ject to tax; tax is payable only on the in­come.

Re­tirees who want to buy, or top up, a liv­ing an­nu­ity must first in­ject the cap­i­tal into an RA fund, Gor­don says.

On the pen­sioner’s death, a ben­e­fi­ciary has the choice of tak­ing any resid­ual cap­i­tal in the liv­ing an­nu­ity in cash or buy­ing an an­nu­ity, or a com­bi­na­tion of both. If an an­nu­ity is pur­chased, the ben­e­fi­ciary will pay tax only on the an­nu­ity pay­ments.

There is no es­tate duty on sav­ings in an RA, un­less the de­ceased made con­tri­bu­tions that did not qual­ify for a tax de­duc­tion, and the sav­ings are not sub­ject to cap­i­tal gains tax.

◆ In­come from a pen­sion is in­cluded in your tax­able in­come, against which you can claim a tax de­duc­tion for con­tri­bu­tions to an RA. In ad­di­tion, you can claim a re­fund of the tax paid on the in­come from a com­pul­sory an­nu­ity to the ex­tent of your af­ter­tax con­tri­bu­tions.

So, an af­ter- tax lump sum in­jected into an RA has tax ben­e­fits for a per­son who is draw­ing an in­come from a liv­ing an­nu­ity or who wants to top up a liv­ing an­nu­ity, Gor­don says.

If the lump-sum in­jec­tions are fully de­ducted, or if the tax on the com­pul­sory an­nu­ity in­come has been fully re­funded by the time the per­son dies, there will be no es­tate duty on the lump sum.

On the other hand, if you put the lump sum in a dis­cre­tionary in­vest­ment, it could be li­able for es­tate duty, de­pend­ing on whether the as­sets in the es­tate that at­tract es­tate duty ex­ceed the es­tate duty ex­emp­tion.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.