It often comes as a surprise to pensioners that they are still liable for tax. The bottom line is if you receive an income above a certain amount, it will be taxed, but there are certain measures that can be used so retirees can reduce their tax.
Most retirees would be receiving an income from an annuity, but some could also earn from a rental property, part-time work, or even interest. All of these amounts are added together and form a retiree’s taxable income.
There are a few tax-relief measures available to retirees and it is important to ensure that when you retire you make the most of these and plan your finances accordingly.
Tax relief measures for retirees
Tax exemption on retirement lump sum: When you retire from a retirement fund, you qualify for a R500 000 tax exemption on any lump sum paid out by the retirement fund – if you have not utilized this previously (for example, if you were retrenched and decided to cash out your retirement fund). It is important to be aware that withdrawal above this is taxable according to the retirement tax tables.
Tax rebate for over 65s: The good news is that when you turn 65, and again at 75, you receive a higher tax rebate, which lowers your tax payable. For the 2022/23 tax year, an person under the age of 65 will pay tax if their taxable income exceeds R91 250. Someone between the ages of 65 to 74 will only pay tax if their taxable income exceeds R141 250 and for those aged 75 and over, they will only pay tax on an income that exceeds R157 900.
Interest tax exemption: Many retirees invest in cash to provide an income in retirement, but interest income can also be taxable if it is not in a retirement fund structure. If you are under 65, any interest income received above R23 800 per annum is added to your taxable income. This means if you have more than around R460 000 invested in an interest account paying a 5% return, this could be taxable. However, once you turn 65, the tax-free amount increases to R34 500, which means you could have nearly R700 000 invested before it is added to your taxable income.
Medical tax credits: There are additional medical tax credits available for retirees from the age of 65. However, you only receive these if you submit a tax return, so it is important to keep your tax return up to date.
More information on ways retirees can reduce their tax
For more information on tax in retirement and how retirees an reduce their tax, get a copy of Daniel Baines’s book How to get a SARS refund for Retirees. At only 50 pages long it is an easy read, with simple examples on how to make the most of the tax relief measures available. Baines is an attorney with a Masters in taxation and currently works as a tax professional in South Africa.
This article first appeared in City Press.
Hi Maya, thanks for all the info and advice you provide. My question is related to you saying that your Mom receives dividends from her share portfolio which she uses for her income needs. I am 52 yrs old and want to retire at 55 due to health issues. The projections shows that my funds are not going to be adequate for my income requirements, being R420 000 annually. I know it’s very late to probably do this but I was thinking of starting a share portfolio that could compliment my current pension fund which stands at R3 600 000. I want to basically duplicate your Mom’s share portfolio. I would appreciate it if you could provide the share names and their respective quantities. I aim to first max out the TFSA yearly and then try to add to a personal portfolio when possible.
I would strongly advice you to work with a good financial planner in this regard. My mother has a fund manager who runs the portfolio to balance dividends and interest. Currently a high dividend yielding portfolio would get you maybe 5% per annum. The key to a dividend portfolio is time – the dividend grows relative to the amount you invested. https://mayaonmoney.co.za/2014/11/using-dividends-to-earn-an-income/
I am constantly being told that having my pension invested in a fixed deposit with the bank,is a big mistake,I also get asked why do I pay provisional tax,those who ask are with investors and claim they don’t pay tax,I am aware that the amount invested determines the tax liable.Would just like clarification if the people that have given their finances to investors to handle are better off.Regards
Great question! Like all things it depends…a good financial planner can make a huge difference to your retirement outcome, a bad one will just cost you money. Your key considerations:
1. fixed deposit will not keep up with inflation. So you are getting poorer every year as the income you earn will purchase less, as the price of goods and services increase.
2. Investments in the stock market beat cash over time. For example, over the last ten years the average return from a balanced fund (this is an investment that a pension would typically be in) was 5.6% ABOVE inflation – so around 11%.
3. Interest is taxed as income – it depends on your tax rate but it can be more tax efficient to earn an income from dividends and capital gains (again an investment).
This is complicated, so what I will do is have a podcast discussion on just this for you 🙂
Thank you