Tax planning for retirement By Jenny Gordon, head: Retail Legal

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1 Tax planning for retirement By Jenny Gordon, head: Retail Legal

2 Agenda Tax deductions on contributions from 1 March 2015 Non-retirement funding income Tax during build up Tax on transfers Tax on lump sum withdrawals, retrenchment, retirement Tax on death Tax on disability Estate planning and retirement annuity funds Medical tax credits Tax on discretionary investments

3 Current tax on contributions Employer contributions on pension and provident funds are deductible up to 20%

4 Contributions 1 March 2015 One deduction for all funds Individual s deduction 27,5% of remuneration or taxable income Maximum R per year ( R ) Carry over of over contribution against lump sums Employer contribution deemed to be fringe benefit of employee Commute for a lump sum when 2/3 is R ,5% includes cost of life cover and administration charges

5 Taxable income versus remuneration 27.5% of taxable income or remuneration What is taxable income? Includes annuities, capital gains, remuneration less deductions What is remuneration? Salary, leave pay, bonus, gratuity, commission, R annual cap applies across all funds No distinction between retirement fund income and non retirement fund income under the new system If employer pays 7% and employee 7% of salary =14% 27.5% - 14% = 13.5% of salary remaining for RAF

6 Contributions by employers and members If the employer contributes on your behalf, the contribution amount will be added to your payslip as a fringe benefit You will then get a tax deduction equal to that fringe benefit amount. The tax deduction effectively eliminates the tax paid on the fringe benefit, putting you in a tax neutral position.

7 Retirement funding income vs Non-retirement funding Pensionable versus non-pensionable If salary was used to base employer contribution = pensionable If bonus not = non-pensionable or non-retirement funding income Retirement annuity funds 15% of non-retirement funding income If employer 7% and employee 7% = 14% But if all RFI Then no NRFI so no tax deduction for retirement annuity

8 Example Mr X earns R1million salary. He sells shares and makes a capital gain of R (33.3% taxable) He earns rental income of R from his second property. But has expenses of R He sells his third property and makes a capital gain of R (33.3% taxable) He is a member of a pension fund with his employer. The contribution rates are 13%; 15%;17%;19% of pensionable salary. Pensionable salary is 75% of remuneration. He chooses 19% How much can he contribute to his pension fund? And how much can he top up with a retirement annuity fund? Salary R CGT on shares (33.3%) R Rental (R R90 000) R Sale of Property (33.3%) Total R % of remuneration = R or 27.5% of taxable income = R (capped at R ) 19% x R = R R R = R He can perhaps make a contribution to a RAF or some funds provide for AVCs

9 Build up in a retirement fund No dividends tax No income tax No capital gains tax No estate duty both lump sums and annuity

10 Preservation Preservation encouraged Tax-free transfers from 1 March 2015

11 Preservation Currently Preservation encouraged Pension to all (except provident) = tax free Provident to all = tax free RA to RA From 1 March 2015 All tax free

12 Withdrawal before retirement Taxable lump sum 2014/2015 R0 R Rate of tax 0% of taxable income R R % of taxable income above R R R R R % of taxable income above R R % of taxable income above R

13 Lump sums at retirement, retrenchment, death Taxable Lump sum 2014/2015 R0 R Rate of tax 0% of taxable income R R % of taxable income above R R R R R % of taxable income above R R % of taxable income above R

14 Severance benefit Means any lump sum benefit from an employer (not from a fund) on termination of service if: Age 55 Ill health Retrenchment Same table as retirement funds If you have used your tax-free amount on severance benefit can t have it again

15 Withdrawal and retirement tables Withdrawal table Retirement table Tax on R = R R = R (21.42%) Tax on R = R (12.42%) R less R Difference = R

16 What happens if I contribute more than I can deduct? 3 possibilities 1. Carry over to following years 2. Offset against lump sums on retirement or withdrawal 3. From 1 March 2014 contributions which weren t deductible can be offset against annuity income

17 Example of carry over 2015/2016: Assume maximum deduction is R contributed R (over contribution R ) 2016/ 2017: 27.5% of taxable income is R but only contributed R R less R = R Can carry forward R of the over contribution made in the 2015/16 tax year.

18 Example of deducting against lump sums in retirement Assume over lifetime R contribution not deductible On retirement: 1/3 of retirement capital = R 6 million: 1/3 = R2 million R retirement table = tax on lump sum R R500 0% = R1million tax free R R700 = R R R % = R Balance taxed at 36%

19 Write-off against compulsory annuity income Since 1 March 2014 Any contribution which was not tax deductible can be set off against compulsory annuity income until the full contribution has been written off The over contribution must first be set off against lump sums If lump sum less than the over contribution the balance can be set off against compulsory annuity income Can elect not to take a lump sum

20 Example of writing off against compulsory annuity When Mr A retired from employment he took 1/3 in cash and bought a compulsory annuity with the balance. He currently draws R per month from the annuity. After retirement he contributed R1 million to a RAF which was not tax deductible. He will be able to claim back the tax payable on R x 12 = R from his annuity against his over contributions to the RAF There will be R remaining He retires from his RAF. He decides not to commute any lump sum and purchases a living annuity. He draws R per month from the living annuity R R = R annuity income can be written off against the remainder of the R every year until the full amount has been written off

21 Should I take 1/3 as a lump sum? Considerations Tax rates lower in retirement than at retirement Tax threshold increases each year

22 Tax on pensions Pension types all taxed at marginal rates Guaranteed With profit Living annuities (2.5% to 17.5%) In fund or insurer Underlying growth no tax

23 Tax rebates 2013/2014 tax year 2014/2015 tax year Primary rebate R R Secondary rebate (applicable to taxpayers age 65 and over) Third rebate (applicable to taxpayers age 75 and over) R6 750 R7110 R2 250 R2 367

24 Tax thresholds 2013/2014 tax year 2014/15 tax year Below age 65 R R Age 65 and over R R Age 75 and over R R

25 Medical tax credits Monthly medical tax credits for taxpayers Member First beneficiary Additional beneficiaries Family of four 2014/2015 R257 R257 R172 R858 Family of four annual credit R858 x 12 = R Operates like an additional rebate 25% under % over 65

26 1 March 2014 Medical Tax Credits NO MORE DEDUCTIONS TAX CREDITS ONLY 3 TIER ENQUIRY

27 With effect from 1 March 2014 under 65 Medical schemes fees tax credit (per table) 1. Additional medical expenses tax credit of 25% of: Fees paid to medical scheme as exceeds 4 x the medical schemes fees tax credit; and qualifying expenses which exceed 7.5 %of taxable income

28 Example under 65 Mr X earns R1 million taxable income. His medical scheme contribution for his family of 4 is R He has additional qualifying expenses of R Medical tax credit family of four = R Medical aid contribution = R per year. 4 x R = R R R = R Additional medical expenditure: R R R = R % of R1 million = R R is greater than R Total tax credit = R10 296

29 Person of 65 years and people with disabilities Medical schemes fees tax credit (per table) Additional medical expenses tax credit, being 33.3% of the amount of fees paid to a medical scheme as exceeds three times the amount of the medical schemes credit; and 33.3% of qualifying medical expenditure

30 Example over 65 Medical aid contribution R3 000 per month. Husband and wife. Additional medical expenditure R per year. Assume R514 per month credit = R (R 6168 x 3 = R ) R36000 R = R x 33.3% = R R x 33.3% = R8 832 Total credits = R Medical scheme fees tax credit R Additional medical expenses tax credit R (R R8 832)

31 Age 65 medical expenditure 2013/ /2015 Gross income Less exemptions = INCOME less DEDUCTIONS = nil all medical expenditure Eg : R nil nil TAXABLE INCOME Apply tables Tax per tables R R Apply rebates R R Apply medical credit - R TAX PAYABLE R R

32 Disability cover Current legislation: Member monthly disability benefit premiums: No tax payable on premium. Tax deductible for employee Disability monthly income at claim stage: Taxable as income in the hands of the employee New legislation: (Effective 1 March 2015) Member monthly disability benefit premiums: Taxable as a fringe benefit in the hands of employee Disability monthly income at claim stage: Paid out tax-free in the hands of the beneficiary (employee) This means that everyone who has disability cover will take home a few Rands less per month because the premium is taxable.

33 Unapproved life cover v approved life cover Approved = held in retirement fund Contributions part of 27.5% = deductible Payment to beneficiaries per discretion of trustees Lump sums = taxable per death/retirement table Annuities = taxable for beneficiaries Not estate dutiable Unapproved taken out by employer on life of employee Employer pays premium Employee taxed on premium as fringe benefit Proceeds paid to chosen beneficiaries as lump sum not taxable Estate dutiable

34 Retirement annuity funds as a planning tool Proceeds of retirement funds not subject to Estate Duty In other words lump sums not subject to Estate Duty In other words annuities not subject to Estate Duty No CGT on proceeds Beneficiaries benefit from over contribution on lump sums if member dies before full write off Contributions to RAF reduce Estate Duty in estate Can reduce estate dutiable value of estate at advanced age

35 Example: Contributing more Mr X has R5 million in a bank account. Living on interest. On death, depending on other assets it is possibly estate dutiable. He contributes the full amount into a RAF. He dies before retiring and before it has been written off. At date of death it increases to R On the death of a member the R5 million is taxed as if it had accrued to him immediately before he died if the beneficiary takes the amount in cash. R5 million would be tax free. R would be taxed on the retirement table.

36 Example: Contributing more living annuity If the member had retired from the RAF and purchased a living annuity with the R and then died. The beneficiary would be able to take the cash value of the living annuity as a lump sum or has the right to purchase a compulsory annuity. Any lump sum would similarly be tax free up to the non deducted amount of R5million. R should be used to purchase an annuity to avoid taxation of the lump sum. The beneficiary can now repeat the process and take out an RAF and buy an annuity and then write off the contribution against annuity income.

37 Should I have after tax or pre-tax savings? Need a combination Pension funds excellent springboard Usually need a top up Pre-tax usually taxable in retirement Post-tax usually no tax or low tax in retirement Can get optimum income by combining strategies

38 Type of investment New tax incentivised savings product CGT Dividend Withholding Tax No No No Income Small print R per year. Lifetime R Endowments Effective 10% 15% 30% Paid by insurer Unit Trusts 33.3% (13,3%) 15% Marginal rates High liquidity Rentals On sale of property 33.3% (13.3%) No Marginal rates deductible expenses Transfer Duty, low liquidity Interest No No Marginal rates R23 800/ R Retail savings bond No No Same Same Voluntary annuity No Shares 33.3 % (13.3%) 15% No Loan accounts from trusts No No No No Small portion taxable Dependant on rates Larger amounts required

39 Structuring your retirement right for tax starts long before retirement and is a marathon and not a sprint and is fine tuned all along the way

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