Making the Most of your Money - Top Tax Tips for Retirement


Post by: Eastlands Estate, 19 Nov 2019

Retirement. The very word conjures up idyllic images of endless days spent doing all the lovely things you didn’t have time for when you were working. Travelling, spending time with your grandchildren or pursuing hobbies. And of course, retirement does mean all of these things and more – but only if you have the income to pay for all these activities.

Current advances in medical research and technology mean we’re living longer than we’ve ever done before. Many retirees live 20 to 25 years – or longer - after their retirement, which is a long time to plan for financially when your income-earning days are behind you. The upside is that most retirees are largely debt-free – their homes and cars are paid off, and they no longer have to worry about school or university fees. On the downside, there are usually increased medical bills to take into account as you get older.

In South Africa, being a pensioner is not as easy as it is in many countries elsewhere. In the UK and many other European countries, for example, the view is that retirees have spent many years working hard for their money and contributing towards the growth and prosperity of the country in which they live. They should therefore be afforded some tax relief and other financial comforts in their golden years. In South Africa, only six percent of the population is over 65, and includes many of the countries wealthiest individuals. SARS is always looking at news ways to extract more money from the wealthy, regardless of their age. 

As such, savvy financial planning, and staying on top of the relevant tax implications, is imperative if you want to maximise your savings and investments.

Retirement and Tax – What does the Law Say? 

As a retiree over the age of 65, you owe it to yourself to make the best use possible of the all the tax breaks currently available.

Increased Tax Threshold
In 2019, the tax threshold increased significantly for those aged 65 and older. Before this age, the threshold is R78 150 a year. From 65 onwards, however, it increases to R121 000. Essentially this means you can earn a monthly income of R10 083 before having to pay income tax. From the age of 75 onwards, the threshold increases even further to R135 300 annually, or R11 275 per month.

Exemption on Interest
If you’re under 65, your local interest exemption is R23 800 during any given tax year. Once you turn 65, this increases to R34 500, so you can earn interest of up to R2 875 per month without having to pay tax on it.

This exemption is particularly helpful if you withdraw a lump sum from your retirement annuity or pension when you retire and invest it in an interest-bearing account.

Medical Expenses Tax Credit
Increased medical costs are pretty much a given as we age. This is why the additional medical expenses tax credit available to over 65s is so useful. The credit applies to a percentage of the fees for medical treatment that have not been covered by your medical aid, but were instead paid for by you personally.

Investment Portfolios
If you have an existing unit trust investment portfolio, it can be one of your best sources of retirement income. Withdrawals from these portfolios is not seen as taxable income. You may however, be liable for income tax on the dividends or interest the portfolio receives, but this is usually lower than ordinary income tax, thanks to the exemption available for these types of passive incomes.

Gifts to a Spouse
Section 56(1)(b) of the Income Tax Act states that donations between spouses are exempt from donations tax. This exemption can prove extremely beneficial if you are restructuring your personal estate.

Timing of Withdrawals
Withdrawing funds from one or more of your investments during your retirement is not something you should do at random. There are tax implications on these types of withdrawals depending on the timing, so it’s always best to get expert advice from your financial advisor or tax consultant before doing so – or, indeed, before taking any course of financial action.

 

Disclaimer:
While we at Eastlands always have the best interests of our residents at heart, we are not professional financial experts. The information in this newsletter is factually correct and up to date as far as we are aware, but it does not constitute actual financial advice or recommendations. It is intended to make you more aware of your options when it comes to taxation in your retirement, but we always recommend speaking to a professional before making any final decisions.

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