RA Tax savings

Gavin Bramley

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Many people believe that a retirement annuity merely defers the tax liability that you may have to when you retire. In other words, either you pay tax now, or the receiver will catch up with you and you will pay the (same amount of) tax then. THIS IS INCORRECT.

Have you not noticed how the South African Tax tables have been slowly changing over the past six years?

Here are some highlights to refresh your memory:

In 1998/99:

	Your marginal rate of tax (the rate of tax you paid on each additional Rand earned) was 45% on earnings exceeding R120.000.
	At this income level, your average rate of tax (your total tax bill divided by your total earnings) was 35%.

Today:

	Your marginal rate of tax on an income of R120.000 is only 30%.
	Your average rate of tax on this amount is 20.89%

The trend over the past six years is towards lower personal income tax!

In fact, a 65 year old is able to draw an income of R50.000 per annum tax free. This amount is R100.000 tax free for a 65 year old couple.

Now consider the Tax advantages of the RA (retirement annuity).

	Tax deductibility of 15% of income at a marginal rate of up to 40%.
	No tax on Capital Gains in the fund.
	Retirement lump sums are taxed at your average rate of tax.
	Pension payments are free of estate duty.

At 65, your medical costs become 100% tax deductible, say R24.000 per annum, which can be added to your tax free income of R50.000 plus the R16.000 interest exemption, which totals R90.000 per person. That is R180.000 per couple TAX FREE. Every year the tax rebates are being increased and the tax rates lowered which means that the tax-effectiveness of RA’s are continually improving.

A Retirement annuity pays a lump sum of up to 1/3 of the proceeds at the option of the investor. Up to R120.000 of this is generally tax-free with the balance taxed at your average rate of tax. In our example of an individual earning R120.000 his/her average rate of tax was 20.89%. Only that portion of the 1/3 lump sum that exceeds the tax free portion will be taxed at this rate. However, all your deductible contributions would have been deducted at your annual marginal rate of tax (from 45% in 1998/9 down to 30% in 2004.

Example of an RA payout of R1.350.000, and evidence of the total tax burden being just 5.11% on this whole amount.