Question

I recently read an article of yours where you discussed the importance of managing the sources of your retirement income to reduce the tax that you pay.   I have R9m in retirement savings and a similar amount in an investment account. How should I go about structuring my income in order to pay the least amount of tax. I will need R60,000 a month after tax.

Answer

I will show you how I would unpack the options on how you can get the best after tax income by taking the least amount of money out of your investments.  This will require some tax calculations and for the sake of simplicity, I will be ignoring some of the smaller deductions.  Before you make a final choice, please sit down with a planner and get an accurate set of calculations done.

If all your income was fully taxable, you would need a monthly income of R85 200 in order to receive R60 000 a month after tax.  This equates to an annual withdrawal of over R1m from your investments.

If you split the income on a 50/50 basis from each source, you can reduce your annual drawdown by over R120 000 because the income from the discretionary funds will only attract capital gains tax

As your retirement savings are fully taxable, you should, try to take the lowest possible amount from this source.  The lowest drawdown that you can take from a living annuity is 2.5% so using this, we have:

As you can see, we are able to reduce the annual drawdown by a further R75 000. 

Now if you wanted to be really clever, you could make an additional contribution to a retirement annuity.  Even if you have retired, you are allowed to invest 27.5% of your taxable income into a retirement annuity.

In the example above, your taxable income would be R35 417 which equates to R425 004 a year.  If your invested 27.5% of this (which is R116 876) into a retirement annuity, your taxable income would drop to R308 128 a year which comes to R25 677 a month. We now have the following:

You can therefore increase your after-tax income by investing some of your discretionary savings into a retirement annuity.

As you can see, some clever planning can make a massive difference to your after-tax income. There are other retirement decisions that will also impact on your wealth. These would be on the strategic use of a guaranteed life annuity and the size of the retirement lump sum that you take.  I would recommend that you chat to someone who can help you make the best choices.