Retirement fund withdrawals and tax
With tax season in full swing, it’s a good time to review the tax implications of retirement fund withdrawals says Carla Rossouw (pictured), tax specialist, Allan Gray. The 2014 National Budget introduced changes to the retirement tax table, namely that from 1 March 2014, the tax-free amount members and beneficiaries can take as a lump sum pay-out from retirement funds increased from R315 000 to R500 000.
The increased tax-free allowance, however, should not tempt you to reduce the money you need to put aside to fund a monthly income in retirement, particularly as it is now quite common for people to live for a long time after they retire.
The risk that you outlive your savings is real and therefore the financial decisions made when you retire require a sober assessment of your capital, your time horizon, your appetite for investment risk and the returns you will need to fund your lifestyle.
If you are not planning to spend the tax-free lump sum immediately, depending on your circumstances, it may be better to buy a living annuity and take a small or zero lump sum, or to take the full tax-free lump sum and invest this directly. Simply investing the tax-free lump sum gives you the maximum discretion on how and when to spend it. Living annuities have advantages too: in a living annuity you will not pay tax on the returns you earn, only on the money you draw as an income. Living annuities are also excluded from your estate, so they do not attract estate duty. Living annuities restrict how much you may take out each year, which could be positive for discipline (also for your heirs’ discipline) or negative if you need money in an emergency.
A good independent financial adviser can help you to work through these decisions; it is also often helpful to ask for more than one opinion.
Tax calculations on lump sums from retirement funds after 1 March 2014 apply a higher lifetime cap but are not retrospective. When a retirement fund member or beneficiary takes a cash lump sum from a retirement fund at retirement or on the death of the member, the retirement tax table prevailing at the time determines the amount of tax to be paid.
All the benefits received or accrued on or after 1 October 2007 are added together to calculate how much tax is owed. A portion of this amount is tax free. This tax-free amount is a ‘once-in-a-lifetime’ benefit, irrespective of the number of retirement funds to which a taxpayer belongs, and is reduced by any retirement lump sums or withdrawals taken previously, for example, when the taxpayer changed jobs and took a cash lump sum.