Question:
I have a paid up Compulsory Life Annuity of R273,551 which pays me R1711.10 per month with 35% tax reducing it to R1,112.21 per month which is roughly 7.5% p.a of the value of the retirement annuity. I've been told I can increase this to 17% which would increase the monthly income to around R3,875. Is this permissable, what are the implications, and is there any way to reduce the high tax rate of 35%?
Answer:
Ray, You should not pay any tax on such a low annuity income (unless you have other income which pushes your marginal tax rate to 35%). Unless you provided your living annuity administrator with a tax directive, they should not be deducting this tax. You can increase your draw-down rate up to 17,5% if you own a living annuity (which is different than a guaranteed "for life" annuity). Even at that draw-down rate, you should not pay any tax on that income. But if you draw down at that rate, you will deplete your capital very quickly (within 10 years) and your income will start falling well before then.
