Tax planning for retirement By Jenny Gordon, head: Retail Legal
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
Current tax on contributions Employer contributions on pension and provident funds are deductible up to 20%
Contributions 1 March 2015 One deduction for all funds Individual s deduction 27,5% of remuneration or taxable income Maximum R350 000 per year ( R 1 272 727) 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 R100 000 27,5% includes cost of life cover and administration charges
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, R350 000 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
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.
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
Example Mr X earns R1million salary. He sells shares and makes a capital gain of R300 000.(33.3% taxable) He earns rental income of R100 000 from his second property. But has expenses of R90 000 He sells his third property and makes a capital gain of R500 000.(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 R1 000 000 CGT on shares (33.3%) R100 000 Rental (R100 000 R90 000) R10 000 Sale of Property (33.3%) 166 500 Total R1 276 500 27.5% of remuneration = R275 000 or 27.5% of taxable income = R 351 037 (capped at R350 000) 19% x R750 000 = R142 000 R350 000 R142 000 = R208 000 He can perhaps make a contribution to a RAF or some funds provide for AVCs
Build up in a retirement fund No dividends tax No income tax No capital gains tax No estate duty both lump sums and annuity
Preservation Preservation encouraged Tax-free transfers from 1 March 2015
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
Withdrawal before retirement Taxable lump sum 2014/2015 R0 R25 000 Rate of tax 0% of taxable income R25 001 R660 000 18% of taxable income above R25 000 R660 001 R990 000 R990 001 + R114 300 + 27% of taxable income above R660 000 R203 400 + 36% of taxable income above R990 000
Lump sums at retirement, retrenchment, death Taxable Lump sum 2014/2015 R0 R500 000 Rate of tax 0% of taxable income R500 001 R700 000 18% of taxable income above R500 000 R700 001 R1 050 000 R1 050 001 + R36 000 + 27% of taxable income above R700 000 R130 500 + 36% of taxable income above R1 050 000
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
Withdrawal and retirement tables Withdrawal table Retirement table Tax on R1 050 000 = R 203 000 + R 21600 = R 225 000 (21.42%) Tax on R1 050 000 = R 130 500 (12.42%) R225 000 less R130 500 Difference = R 94 500
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
Example of carry over 2015/2016: Assume maximum deduction is R350 000 contributed R450 000 (over contribution R100 000) 2016/ 2017: 27.5% of taxable income is R300 000 but only contributed R150 000 R300 000 less R150 000 = R150 000 Can carry forward R100 000 of the over contribution made in the 2015/16 tax year.
Example of deducting against lump sums in retirement Assume over lifetime R500 000 contribution not deductible On retirement: 1/3 of retirement capital = R 6 million: 1/3 = R2 million R500 000 + retirement table = tax on lump sum R500 000 + R500 000 @ 0% = R1million tax free R500 000 R700 000 @18% = R 36 000 R700 000 R1050 000 @ 27% = R 94 500 Balance taxed at 36%
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
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 R20 000 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 R20 000 x 12 = R240 000 from his annuity against his over contributions to the RAF There will be R840 000 remaining He retires from his RAF. He decides not to commute any lump sum and purchases a living annuity. He draws R10 000 per month from the living annuity R240 000 + R120 000 = R 360 000 annuity income can be written off against the remainder of the R840 000 every year until the full amount has been written off
Should I take 1/3 as a lump sum? Considerations Tax rates lower in retirement than at retirement Tax threshold increases each year
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
Tax rebates 2013/2014 tax year 2014/2015 tax year Primary rebate R12 080 R12 726 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
Tax thresholds 2013/2014 tax year 2014/15 tax year Below age 65 R67 111 R70 700 Age 65 and over R104 611 R110 200 Age 75 and over R117 111 R123 350
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 = R10 296 Operates like an additional rebate 25% under 65 33.3% over 65
1 March 2014 Medical Tax Credits NO MORE DEDUCTIONS TAX CREDITS ONLY 3 TIER ENQUIRY
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
Example under 65 Mr X earns R1 million taxable income. His medical scheme contribution for his family of 4 is R60 000. He has additional qualifying expenses of R20 000. 1. Medical tax credit family of four = R 10 296 2. Medical aid contribution = R60 000 per year. 4 x R10 296 = R 41 184 R60 000 R41 184 = R18 816 Additional medical expenditure: R20 000 R20 000 + R18 816 = R38 816 7.5% of R1 million = R75 000 R75 000 is greater than R38 816 Total tax credit = R10 296
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
Example over 65 Medical aid contribution R3 000 per month. Husband and wife. Additional medical expenditure R25 000 per year. Assume R514 per month credit = R 6168. (R 6168 x 3 = R 18 504) R36000 R18 504 = R17 496 x 33.3% = R5 826.16 + R25 000 x 33.3% = R8 832 Total credits = R20 692 1. Medical scheme fees tax credit R6 168 2. Additional medical expenses tax credit R14 524 (R5 826 + R8 832)
Age 65 medical expenditure 2013/14 2014/2015 Gross income 500 000 500 000 Less exemptions = INCOME less DEDUCTIONS = nil all medical expenditure Eg : R 61000 nil nil TAXABLE INCOME 439 000 500 000 Apply tables Tax per tables R 111 215 R132 566 Apply rebates R 18 830 R 19 836 Apply medical credit - R 20 692 TAX PAYABLE R 92 385 R 92 038
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.
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
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
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 R5 500 000. 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. R500 000 would be taxed on the retirement table.
Example: Contributing more living annuity If the member had retired from the RAF and purchased a living annuity with the R5 500 000 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. R500 000 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.
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
Type of investment New tax incentivised savings product CGT Dividend Withholding Tax No No No Income Small print R30 000 per year. Lifetime R500 000 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/ R34 500 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
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