Retirement annuities are tax-efficient investment vehicles, meaning that they come with tax rebates for investors. These are the three primary tax incentives that come with contributing to your retirement annuity (RA):
1. Investors do not pay tax on capital gains, interest nor on dividends earned.
You stand to compound the growth on your investments when capital earned is untaxed and reinvested.
2. Investors receive a tax-free lump sum upon retirement.
Once you get to the retirement stage, you are allowed to take one-third of your savings (you can withdraw all of your savings if your RA amounts to less than R247,500 in its entirety). The first R500,000 lump sum is untaxed. Amounts withdrawn thereafter get taxed at an increasing rate.
3. Contributing to an RA offsets your tax liability
Under S11(F) of the income tax act, retirement annuity contributions are tax deductible to a limit of 27.5% of taxable income, capped at an annual limit of R350 000. This means that if you contribute to a retirement annuity during a tax year, you may be eligible to reduce your taxable income by the total contributions you made (with limits, mentioned above, of course).
There are two instances in which you would have to pay tax (these don’t include penalties):
1. Exceeding the allowed lump sum withdrawal
As mentioned in the second point above, lump sums taken that exceed R500,000 upon retirement are taxed at increasing rates. The table below shows the tax rate investors would be due to pay when making withdrawals:
a. Before maturity (withdrawal lump sum)
b. Upon maturity (retirement lump sum)
Please note that withdrawals made before maturity are aggregated up to your retirement lump sum, so extra caution is required when making withdrawals.
| Tax rate | Withdrawal lump sum | Retirement lump su |
|---|---|---|
| 0% | 0 – R25,000 | 0 – R500,000 |
| 18% | R25,001 – R660,000 | R500,001 – R700,000 |
| 27% | R660,001 – R990,000 | R700,000 – R1,050,000 |
| 36% | R990,001+ | R1,050,001+ |
2. Converting your annuity to retirement income
When you retire, you must use at least two-thirds of your benefit to buy an annuity, provided that the RA value is more than R247,500. The annuity income is subject to income per the standard income tax tables.
