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Retirement Planning: Retirement

I am about to retire what options do I have?

While you may be entitled to a pension or income from your employer during retirement, you're increasingly likely to be responsible for providing for your retirement needs. Retirement is no longer a short-term proposition! The average life expectancy is increasing each year. A man aged 65 can expect to live until 77; a woman aged 60 until 81.

 

Requirements
• You need to be over 55.
• You must retire from all retirement funds at the same time.
• The rules of your pension or provident fund will stipulate a normal retirement age for your fund.

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Living Annuities

Should I buy a living annuity?

A living annuity is a modern life annuity, which gives you the advantage of being able to select the rate, currently between 2.5% and 17.5% at which the retirement capital is paid out to you.

Any retirement capital remaining after your death remains in the estate. Each year on the anniversary date you can change the income received to suit your circumstances.

Living annuities offer you an extremely wide selection of investment options, unit trusts, guaranteed funds, money market funds and many more choices. You can switch between these asset classes at any time.

Living annuities are now most probably one of the most popular choices made by the sophisticated investor.

Important considerations when taking out a living annuity
• You can liquidate the original investment at a faster rate if you have health concerns.
• You will have total transparency on costs and your value is available on a daily basis.
• The income can be changed on your anniversary date to suit your needs.
• You can convert to a standard life annuity at any stage.

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Should I annuitize?

Annuitizing your pension or provident fund means surrendering all or a portion of your accumulated retirement benefits in exchange for receiving regular payments for life.

In essence, annuitizing is a gamble, as the annuity is based on one's life expectancy; you are gambling that you will outlive your actuarial life expectancy.

Another problem is that on your death there will be nothing left for your heirs.

Different types of compulsory annuities

The level of income is determined by three factors, namely, gender, age and interest rates at the time of purchase.

Nil guarantee annuity

This annuity pays the highest monthly income but on death the capital is lost. This would be ideal for a retiree who has no dependants or does not want to leave any capital behind after his or her death. An insurance policy can be taken out to protect the capital with no underwriting. However, premiums will have to be paid on the new policy.

Joint and survivor annuity

These have an unlimited term. They pay a full annuity while both the lives assured are alive and may reduce at the clients request when the first life assured dies. The annuity stops paying upon the death of the second life assured. These annuities are sold with part of the term guaranteed (e.g. 10 years)

An escalating annuity

It is possible to purchase an annuity that starts at a lower initial level but has an escalation factor built into it. This would protect you to a certain extent in your later years of retirement.

Important considerations when taking out an annuity

Annuities are good when interest rates are high.

No capital lump sum will be paid out on death unless you have a back-to-back policy (life policy).

You cannot change the income to suit your needs.

The taxman does not allow you to buy more than one annuity unless the income is more than R150 000 pa.

Different insurance companies pay different rates and these change on a daily basis.

Totally inflexible

If you start to work again, you cannot reduce your income as with a living annuity. Effectively you then would have a double income and pay tax at the higher marginal rate.

Retire on the company's pension

In the past most people retired on the company's pension this however has changed with the move to defined contribution pension or provident funds. Some companies still allow their staff to retire from the fund and will then pay them a pension for life. These companies will give you a quote at retirement and you will be able to see exactly what options you have.

Things to think about

  • The income increases are at the total discretion of the trustees.
  • With the escalating costs for employers risk benefits (group life and disability) the portion left over for investment in the pension or provident fund is reduced and so the returns will drop. The surplus and distributions therefore would also be affected and hence lower pension increases in the future.
  • The company could, at a later stage, outsource the pensioners to a company of their choice.
  • The trustees will make and be responsible for the investment decisions. Are they trained and do they have the experience to make these decisions?
  • Your income cannot be adjusted and is fixed.
  • You have no say as to the composition and asset allocation of your funds.

 

PROVIDENT FUND

PENSION FUND

RETIREMENT ANNUITY

RETIREMENT BENEFIT

 

 

No tax payable on lump sums for individuals with a taxable Income of R46 000 or less. (With effect from 1 March 2008)

Cash Lump Sum

Cash Lump Sum

Cash Lump Sum

Entire amount or surrender value of policy

1/3 of total value (if 2/3 of the total value of the annuity that is due upon retirement is less than R50,000, full benefit)
Section 1 “pension fund” (c)(ii)(dd) Balance used to purchase a comp. annuity taxed i.t.o. tax tables.

1/3 of total value (if 2/3 of the total value of the annuity that is due upon retirement is less than R50,000, full benefit)
Section 1 “ RA fund” (b)(ii) Balance used to purchase a comp. annuity taxed i.t.o. tax tables.

Deductible Contributions

It has been proposed (with effect 1 March 2014) that all taxpayer contributions to approved pension, provident and retirement annuity funds are consolidated with the following caps: contribution deductions will be capped at 22.5% of the higher of employment or taxable income with a maximum rand amount of R250 000 for those younger than 45 years.  These limits will include risk and administration costs as well as employer contributions that have been fringe benefits taxed.  A minimum annual deduction of R20 000 will apply.

Taxable Lump sum

Taxable Lump sum

Taxable Lump sum

The taxable retirement fund lump sum is the benefit derived in consequences of the retirement, less the following amounts, if they have not enjoyed deductions before:

  • Contributions;
  • Previously taxed transfer of divorce awards to the retirement fund;
  • Previously taxed transfer of benefits to a retirement fund; and
  • The pre- 1998 amounts transferred from public sector funds.

The taxable retirement fund lump sum is the benefit derived in consequences of the retirement, less the following amounts, if they have not enjoyed deductions before:

  • Contributions;
  • Previously taxed transfer of divorce awards to the retirement fund;
  • Previously taxed transfer of benefits to a retirement fund; and
  • The pre- 1998 amounts transferred from public sector funds.

The taxable retirement fund lump sum is the benefit derived in consequences of the retirement, less the following amounts, if they have not enjoyed deductions before:

  • Contributions;
  • Previously taxed transfer of divorce awards to the retirement fund;
  • Previously taxed transfer of benefits to a retirement fund; and
  • The pre- 1998 amounts transferred from public sector funds.

Provident Fund, Pension Fund and Retirement Annuity

The taxable retirement fund lump sum accrued from 1 October 2007, withdrawal benefits accrued from 1 March 2009 and severance benefits from 1 March 2011 are aggregated.  The aggregated lump sum is taxed as follows:

Taxable Income from lump sum benefits

Rate of Tax

R0                    -           R500 000

0% of taxable income

R500 001         -           R700 000

R0 plus 18% of taxable income exceeding R500 000

R700 001         -           R1 050 000

R36 000 plus 27% of taxable income exceeding R700 000

R1 050 001 and above

R130 500 plus 36% of taxable income exceeding R1 050 000

The tax is reduced by the tax calculated in accordance with the above table on such lump sum benefit accrued prior to the lump sum in respect of which tax is being determined.

Tax free portion

Tax free portion

Tax free portion

Taxed as per table in item 7 of Appendix 1 to the Income Tax Act as follows:
The first R315 000 of the taxable amount at 18%
The next R315 000 of the taxable amount at 27% and
The balance of the taxable amount at 36%
Section 5(2)

Taxed as per table in item 7 of Appendix 1 to the Income Tax Act as follows:
The first R315 000 of the taxable amount at 18%
The next R315 000 of the taxable amount at 27% and
The balance of the taxable amount at 36%
Section 5(2)

Taxed as per table in item 7 of Appendix 1 to the Income Tax Act as follows:
The first R315 000 of the taxable amount at 18%
The next R315 000 of the taxable amount at 27% and
The balance of the taxable amount at 36%
Section 5(2)

 

Retirement Benefit
(Public Sector
Funds)

All lump sum benefits paid from a public sector fund were all tax-free until 1 March 1998

Thereafter parity between public and private sector fund taxation.  Vested rights are protected by formula C in the Second Schedule to the Income tax Act.  If a Public Sector fund is involved, the following calculation must be done:

All lump sum benefits paid from a public sector fund were all tax-free until 1 March 1998

Thereafter parity between public and private sector fund taxation.  Vested rights are protected by formula C in the Second Schedule to the Income tax Act.  If a Public Sector fund is involved, the following calculation must be done:

 

1.             Apply formula C:
                A = B x D, where:
                      C
 A =  the taxable portion of the lump sum to be included in gross income (subject to any further deductions allowed by paragraphs 5 and 6 of the Second Schedule).

B = the number of completed years of employment, after 1 March 1998, including previous or other period of service approved as pensionable service after 1 March 1998

C = the total number of completed years taken into consideration for the purpose of determining the amount of benefits payable to the member by the fund.

D = the lump-sum benefit

2.             Apply formula B:  (Z = C + E – D) and the taxable amount is taxed as per table in item 7 of Appendix 1 to the Income Tax Act.

1.             Apply formula C:
                A = B x D, where:
                      C
 A =  the taxable portion of the lump sum to be included in gross income (subject to any further deductions allowed by paragraphs 5 and 6 of the Second Schedule).

B = the number of completed years of employment, after 1 March 1998, including previous or other period of service approved as pensionable service after 1 March 1998

C = the total number of completed years taken into consideration for the purpose of determining the amount of benefits payable to the member by the fund.

D = the lump-sum benefit

2.             Apply formula B:  (Z = C + E – D) and the taxable amount is taxed as per table in item 7 of Appendix 1 to the Income Tax Act.

 

Important check list
• Don't retire early as there will be a penalty (defined benefit scheme). The amount (consideration) will be less if you are on a defined contribution scheme.
• Your year's service will increase the tax-free portion on retirement.
• You can claim contributions not previously allowed.
• Will your pension increase in line with inflation?
• What happens to the capital if I die? The full value of the living annuities will be paid out. This will be taxable and will be paid over 5 years. Your beneficiaries can also elect to continue with the living annuity.
• Your company's deferred compensation must be paid out. The first R30 000 is tax-free (provided you have not had this deduction before) and the balance will be taxed at your average rate.
• A withdrawal form must be filled out giving instructions to the pension / provident fund. Your human resources manager must sign this.
• A directive will have to be issued by the Receiver of Revenue for any tax-free benefits and deferred compensation.
• Medical aid - Are you going to continue on your existing medical aid? The premiums are now community rated and the younger members will subsidize the older members.
• Don't invest any money that is tax free into compulsory annuities, as you will pay tax on the income at your marginal rate.

 

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