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

There is no age limit for investing in a retirement annuity. I have several clients who are well into their eighties who are doing so.

There are a number of sound reasons I recommend that retired people consider this course of action. 

1. You get an immediate tax break 

Even if you have retired, you qualify for the tax break on retirement savings. You are allowed to contribute 27.5% of your taxable income into a retirement annuity and have this amount taken off your taxable income.

Example: 

 If you receive a monthly pension of R30,000, in a year you would have received R360,000 in taxable income. 

As you are allowed to contribute up to 27.5% of your taxable income into a retirement annuity, you can invest R360,000 x 27.5% = R99,000. This would result in the amount of your income that you will pay tax on reducing to R261,000. This would give you an immediate saving of R26,849 on your tax bill. 

This means that your R99,000 investment effectively costs you R72,151. Not a bad return before the investment has done anything. 

2. Retirement savings do not form part of your estate 

Estate duty currently runs at 20% for estates below R30-million and 25% above that amount. You will therefore be paying at least R200,000 in estate duty for every R1,000,000 in your estate. Once you have retired, you need to give some thought to how you will pass on your accumulated wealth to your family without incurring too much estate duty. 

One way of doing this is to invest in a retirement annuity. This will take your normal assets that would attract estate duties and move them into an asset class that will not attract the estate duty. 

Example: 

If you receive a monthly pension of R30,000, you would be allowed to contribute R99,000 a year to a retirement annuity. This payment need not come from your monthly pension – it could come from any other investment that you have. 

By doing this, you have moved your R99,000 investment into a class where there will be no estate duty. This would save your family almost R20,000 in estate duty. Now do this every year that you are retired and you will be passing on a significant amount of money to your family rather than having it paid out in taxes. 

3. There are opportunities to reduce capital gains tax (CGT) 

If you sell an asset, you will be charged a tax on the gain. This tax is based on your marginal tax rate. 

If you intend selling some assets such as a property or some investments, reducing your marginal tax rate can make a difference to the CGT that you pay. In the example I gave, where someone was receiving a pension of R30,000 a month, the marginal tax rate was 31%. After making the retirement annuity contribution the marginal tax rate reduced to 26%. This can make a significant difference to the CGT that you pay. 

4. You reduce your executor fees 

If you purchase a retirement annuity, or convert this retirement annuity into a living annuity, you are allowed to attach a beneficiary to this investment. As the investment has a beneficiary, it will not be dealt with by the executor. 

This will save your heirs up to 4% in fees. This equates to R40,000 for every R1,000,000 in the asset. 

Not only do you not pay executor fees, having a beneficiary also makes it a lot easier to pass on wealth. 

I have several clients who are in the process of inheriting money. With the challenges in the Master’s Offices, the whole process has been going on for more than a year, with no end in sight. Where there were beneficiaries attached to assets, the benefit was transferred within weeks. 

n summary, by investing in a retirement annuity you get the following benefits:

• Immediate tax break by reducing your taxable income by up to 27.5%.
• Saving on estate duty, which runs at 20% to 25%.
• Saving in executor fees of up to 4%. Potential saving in CGT should you sell an asset.

It makes a lot of sense for both retired people and people who aren’t retired to seriously consider investing in retirement annuities.