What is an RA?
An RA is nothing more than a one-person pension plan. A person applies to become a member of an RA fund, which is approved as such by the Registrar of Pension Funds and the tax authorities. No employer / employee relationship is required to qualify for membership.
RA’s are the main savings vehicle for self-employed persons to accumulate funds for retirement in a tax-efficient way. They are also popular as a top-up plan for salaried employees who belong to pension and provident funds, to close the income gap at retirement.
Smaller employers often choose retirement annuities for their staff over traditional pension schemes, thereby avoiding the administration and responsibility involved in operating the latter schemes.
Ways To Save Tax With An RA
Most people know that contributions to an RA are tax deductible up to a certain maximum, but few people realise that an RA may actually provide them with an opportunity to save tax in 10 different ways. These are as follows:
- Contributions are tax deductible up to a maximum (15%) (i.e. if you fall in the 40% maximum marginal tax bracket then the Receiver is sponsoring almost half of the contribution towards your retirement).
The maximum tax-deductible contribution for all taxpayers is the greater of:
a) 15 % of the taxpayer’s non-retirement funding income;
b) R3 500 less allowable pension fund contribution;
c) R1 750.
Self-employed taxpayers will use the first option (15% of their taxable income).
Employees should look to this option to maximise their tax deduction. Their calculation is based on the portion of taxable income which is non-salary, for example, investment income, share option taxable benefits, freelance income and fringe benefits such as car and housing allowances which their employer excluded from their pensionable income (the salary on which their pension fund contribution is based).
- RA contributions which exceed the tax deductible limit can be carried forward to be claimed next year (but are nevertheless subject to the same formula limits).
- If your policy lapses and at a later date you reinstate it, you can also deduct R1 800 of your payment as a tax deduction (again the excess can be claimed in future tax years).
- Build up – The build-up of interest, net rental income and local and foreign dividends in retirement funds is exempt from tax. Retirement funds are exempt from Capital Gains Tax and Dividend Withholding tax (15%)
- At retirement, one third of the total retirement funding value may be taken as a lump sum. The balance must be used to purchase a compulsory annuity, taxed at the annuitant’s marginal rate. Where the retirement benefit does not exceed R7500, the entire amount can be taken as a lump sum.
- The taxable portion of the lump sum (at death, retirement or retrenchment) is taxed on a sliding scale as follows:
|Lump Sum Payments on Death, Retirement or Retrenchment|
|R0 – R500 000||To be taxed at 0%|
|Balance is taxed according to a sliding scale|
|R500 001 – R700 000||To be taxed at 18% of the amount above R500 000|
|R700 001 – R1 050 000||To be taxed at R36 000 + plus 27% of the amount above R700 000|
|R1 050 001 and above||To be taxed at R130 500 + 36% of the amount over R1 050 000|
- On death, any benefits paid out by way of an annuity are free of estate duty. (This provides a planning opportunity for the wealthy estate owner to make a large single-premium contribution to an RA in order to reduce his or her estate for duty purposes.)
- The full amount of your Retirement Annuity is protected against insolvency in terms of Section 37B of the Pension Funds Act.
- If you leave your employer and receive a withdrawal benefit from your pension or provident fund, you can preserve your retirement benefit by transferring it into an RA or preservation fund tax-free. Any withdrawal benefits not preserved will be taxed as follows:
|Pre-retirement withdrawals from retirement savings|
|Withdrawal benefits accrued from 1 March 2009 and severance benefits from 1 March 2011 are aggregated. The aggregated lump sum is taxed as follows at retirement:|
|R0 – R25 000||To be taxed at 0%|
|Balance is taxed according to a sliding scale|
|R25 001 – R660 000||To be taxed at 18% of the amount above R25 000|
|R600 001 – R990 000||To be taxed at R114 300 plus 27% of the amount above R660 000|
|R900 001 and above||To be taxed at R203 400 plus 36% of the amount above R990 000|
- On retirement, you have a choice between a conventional annuity and an equity-linked living annuity. By choosing the equity-linked living annuity (assuming your risk profile justifies the decision) you can manage the income you receive (between 2.5% and 17.5 % of the capital amount each year) and consequently also manage your income tax position.
- A compulsory annuity is fully taxable but does have the benefit of the tax threshold: if 65 and older one will only pay tax to the extent that it exceeds taxable income of R110 200, and age 75 and older, R123 550.
- Non-deductible contributions are exempt from income tax regardless of whether these interests are withdrawn as a lump sum or by way of a compulsory annuity. A compulsory annuity includes income drawn from a living annuity. Non-deductible contributions will first be applied to any lump sum and the remainder, if any, will be applied to annuity income.
To encourage South Africans to save for retirement, contributions by employees and employers to pension, provident and retirement funds will be tax deductible by individual employees. Effective 1 March 2016, individual retirement tax deductions will increase as follows:
- Deductions for contributions to retirement annuities, pension funds & provident funds are to be combined.
- A deduction of up to 27.5% of the greater of remuneration or taxable income will be allowed.
- This is capped at R350 000 per annum.
- Excess contributions can be carried over to the following year, subject to the limit of R350 000 per annum.
- Employer contributions will be taxed as a fringe benefit in the hands of the employee (member).