Question

I retired three years ago, with half my income coming from my company pension fund and the other half from interest from investments. I am paying tax at a rate of 41%. Is there anything that I can do to reduce this amount?

Answer

I would need more information on your specific circumstances before I can give you a firm answer.  I will however run through the options that I would consider.

1. Will you actually be liable for estate duty?

The first step is to see whether you would indeed be liable for any estate duty when you pass away.   You and your spouse each get a R3.5 million abatement before any estate duty is payable.  I would therefore do a calculation on your estate duty liability as if you had passed away today and see whether any estate duty would in fact be triggered.

2. Consider donating the asset

Another option that I would consider is to see whether it is viable to set up a structure to pass on this money to your children before you die. If you would like to pass this money on to your children while you are still living, you must structure it cleverly so as not to trigger donations tax (which is levied at the same rate as estate duty).  There are two strategies that you can follow:

• donate the money to your children over a period. You are allowed to donate an amount of R100 000 a year without incurring donations tax. If you have a spouse, he or she could also make a similar donation

• loan the capital to your children and use the annual R100 000 donation allowance to repay the loan.

It is important that you charge your children interest at a rate of the repo rate plus 1%. If you don’t, any shortfall in repayment that is below this rate will be deemed a donation.  The current repo rate is 8.25% so you would need to charge interest and a rate of 9.25%.

3. Make use of a living annuity

Retirement savings do not form part of your estate.  So, if you did not want to pay any estate duty on this money, you could invest it in a retirement annuity, convert the retirement annuity into a living annuity and make your children the beneficiaries when you pass away.

You are allowed to invest any amount you please into a retirement annuity.  It need not be limited to 27.5% of your taxable income.  Any tax break that is not used in the current year will be rolled over to subsequent years.   

Now, if you passed away, the excess retirement contributions (those in excess of 27.5% of your income) will be deemed an asset in your estate and would attract estate duty. However, a change in legislation has given us an opportunity just structure your affairs so that these funds are no longer deemed as assets in your estate.  The change says that if your beneficiary receives the proceeds of your retirement fund as an annuity instead of a lump sum withdrawal then this would not attract estate duty.

Example

1. If you have R5 000 000 to pass onto your children, it would typically attract R1 000 000 in estate duty when you pass away. It would also attract around R201 250 in executor’s fees.

2. If your children took all the proceeds as a living annuity, this would not be deemed an asset so no estate duty would be payable. This would effectively save them R1 201 250 in taxes and executor fees.

In summary:

This is a wonderful way to save taxes and create a multi-generational wealth for your family.