What happens to your tax after retirement? In the previous article, we explained to you what happens to you tax before retirement – how a Retirement Savings Vehicles (RSV) can help you save on paying tax.
When you reach retirement, you need to know how your money will be taxed. As well as, where it is allowed to go in order to make the most informative decision.
Not having a good understanding on post retirement laws could leave you outliving your money.
What happens to my tax after I retire?
Once you reach your desired retirement age (generally between age 55 and 70), you are able to retire from your RSV (Retirement Savings Vehicle).
You are allowed to take some of those funds as a lump sum and the remaining funds need to go into an annuity. Since the amendment to the provident funds act all the RSVs have been aligned.
This means that as of 1 March 2021, the maximum lump sum amount from your RSV is 1/3 of its value.
The remaining 2/3 have to be invested in an annuity which will provide you with an income during retirement.
These rules only apply if you have more than R247 500 across your RSV’s. If you have less, you are allowed to withdraw the entire amount as a lump sum
So what tax do you pay when you retire?
When retiring from your RSV, the government allows you to withdraw a maximum 1/3 of your RSV. Of the 1/3, the first R500 000 is completely tax free.
Anything above R500 000 that is withdrawn is taxed according to the retirement tax tables.
Here’s what happens when Peter retires from his RSVs:
Peter has reached age 65 and would now like to retire.
He has R3 000 000 in his RA and would like to take 1/3 in cash and put the remaining 2/3 into a living annuity.
Peter has not withdrawn any money from his RA before and he does not have a pension or provident fund.
This means that he is entitled to the first R500 000 of his withdrawal, tax free.
3 000 000 x 1/3 = R1 000 000 withdrawing in cash
3 000 000 x 2/3 = R2 000 000 transferring to a living annuity
Since the first R500 000 of his lump sum withdrawal is tax free, he will pay tax on the second R500 000.
According to the retirement tax tables, this will be R85 500 in tax. Therefore the total amount of money he takes home as a lump sum is R914 500.
What happens to the remaining 2/3rds?
Now that you have an idea of how the 1/3 cash withdrawal is taxed, what happens to the remaining 2/3rds?
The remaining funds need to be invested into either a living annuity or a life annuity.
The government has implemented this rule in order for us to earn some sort of an income during retirement.
Living annuities and life annuities pay out a ‘salary’ and is taxed according to the income tax tables.
There is a bit of leniency regarding this tax. There are rebates in place which lower the amount of tax over 65’s pay.
Here’s what happens to Peter now that he has a Living Annuity:
Peter has chosen to receive a monthly income of R20 000 from his living annuity.
He will be taxed according to the income tax tables. Since he is 65 years old, he will benefit from both the primary and secondary rebate.
R240 000 annual income = R45 104 owed in tax
Primary rebate (2022 tax year) = R15 714
Secondary rebate (2022 tax year) = R8 613
Therefore, Peter’s tax liability will be decreased by the rebates:
R45 104 – R15 714 – R8 613 = R20 777
Peter will be receiving R219 223 (after tax) as an income from his annuity.
So, what happens to my tax after retirement?
It is important to understand the legislation around your money after you have retired from a RSV. The earlier you can understand these laws, the better equipped you are to make decisions of where to invest your retirement savings.
Retirement planning is something each of us need to do in order to effectively maintain our financial state for as long as we are around.
To find out more about retirement planning and the laws surrounding it, speak to your financial advisor or contact us.
Add Your Heading Text Here
