Maximising retirement tax benefits

Smart strategies for making the most of your excess retirement vehicle contributions

Question:

My understanding is that if you contribute more than R350,000 a year to a retirement fund/annuity, those amounts not allowed as a taxable deduction are available on retirement when you start drawing an income. Is that correct?

Let’s assume that on retirement you have accumulated R200,000 of such contributions which were not allowed. How will the South African Revenue Service (Sars) treat that R200,000? If in the first year of retirement you have an annual taxable income of R300,000, will it reduce that taxable income by the full R200,000 in one shot, taking your taxable income to R100,000? Or will Sars allow you to spread that R200,000 of accumulated funds over the next five years and use just R40,000 a year to reduce taxable income? Obviously, the tax benefit will be far larger if Sars allows you freedom to use the accumulated R200,000 as you see fit.

Answer:

—

Your understanding is correct: there are two ways of optimising section 10C of the Income Tax Act: either by increasing your tax-free lump sum taken, or by using the lump sum to offset any income tax payable on your income earned from the living annuity/guaranteed annuity. I find the offset benefit the most useful in planning. An analysis of your personal situation can, however, be done by your wealth adviser and tax adviser.

Unfortunately the lump sum cannot be spread throughout multiple years. The income selected on your living annuity and tax payable will have to be offset against the lump sum available annually, until the lump sum has been depleted.

Should your annual tax, for example, amount to R50,000 a year, you will have the benefit of earning a tax-free income for four consecutive years.

Keep in mind this benefit applies to the income earned from your living annuity or guaranteed annuity, and will not apply to other sources of taxable income.

Section 10C of the Income Tax Act states that any contributions not previously deductible in terms of the act (or previously deducted) may be set off against income earned from compulsory annuities. This exemption is not available to any subsequent holders of the annuity (that is, your beneficiaries after your death).

Perhaps an important point to consider, should you opt for a guaranteed annuity and not a living annuity, is that administrators of compulsory annuities will deduct tax according to the PAYE tables from your income before making payment. At the end of the relevant tax year, you may claim this tax (or a portion thereof) back from Sars, if you qualify for the section 10C exemption (source: Ninety One).