Here’s what you need to know about tax in retirement

Knowing the tax benefits available to retired people can be very useful, especially considering the length of some people’s retirement, says Daniel Baines, a legal advisor/tax consultant at PW Harvey & Co. Upon retirement, taxpayers who were members of a pension/retirement annuity fund may take one-third of their savings as a lump sum in cash.

Taxpayers who were members of a provident fund may take the full amount of their savings as a lump sum.

“The first R500,000 of the lump sum withdrawn is tax-free (if the taxpayer has not previously taken a sum out of any retirement fund). Amounts taken above R500,000 are taxed according to the retirement benefit tax table.

“In other words, you are entitled to take R500,000 as a lump sum in cash upon retirement without any negative tax implications,” Baines said.

The remainder of your savings will be placed in a living annuity. A living annuity is an investment vehicle that is purchased once you have ceased contributing to your pension, provident or retirement annuity fund; it provides the person with monthly income.

This income is taxable in a similar manner to employment income, the tax expert said. “However, individuals that are 65 years of age or older on the last day of February are granted additional tax benefits.”

These are as follows:

1. Increased tax threshold

For individuals that are under 65 the tax threshold is R78,150 (for the 2019 tax year). This means that if an individual has taxable income of less than this amount they will not pay any income tax. Once a person turns 65 this threshold increases to R121,000. An individual can, therefore, receive income of R10,083 per month and will not pay any tax.

Once a person reaches the age of 75 years, this threshold increases further to R135,300.

Such a person will be able to receive R11,275 per month tax-free.

2. Interest exemption

Individuals under the age of 65 years are entitled to R23,800 tax-free interest per year.

Once a taxpayer turns 65 this amount increases to R34,500. A person over 65 can, therefore, receive interest of R2,875 per month tax-free. Any interest received over and above these amounts is included in taxable income and taxed accordingly.

It may be wise to take out R500,000 from your retirement fund upon retirement and invest some of this in an interest-bearing account to utilise the interest exemption. In this way you can maximize your tax-free income after retirement.

3. Additional medical tax credit

Persons 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 paid by the person’s medical aid i.e. the person has paid for the expenses themselves.

Expenses such as doctor’s fees, medicine, optometrist fees, physiotherapist fees, nursing assistant fees and hospital fees may be claimed.

“For a person to be entitled to this benefit, proof of all expenses incurred must be retained and submitted to SARS upon request with your annual tax return. This may result in a refund from SARS upon submission of your return,” Baines said.

He stressed that a taxpayer who does not pay tax (i.e. they are below the tax threshold) will not be entitled to a refund from SARS upon filing of their tax return. Taxpayers that have overpaid tax (as a result of, for example, the additional medical tax credit) may receive a refund.

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