When you retire, you’ll have a few options for how to access your retirement savings. You can take up to one-third of the total amount as a cash lump sum — this is called the "savings portion." The remaining two-thirds, called the "retirement portion," must be used to buy an income product, like a living annuity or a life annuity, which will pay you a monthly income.

You can choose how the two-thirds portion is invested, and this will affect how much income you receive and how long it lasts. Keep in mind that both the lump sum and the monthly income are taxed as part of your normal income.

The lump sum would be taxed according to  the lump sum rates - please see our  Lump sum Calculator . The monthly income, also called a pension or annuity income, would be taxed at your marginal rate.

Income from your retirement fund is taxed in the same way as your salary. Unlike the lump sum at retirement, where SARS calculates the tax upfront, your monthly retirement income is treated like regular income and is added to any other taxable earnings you receive during the tax year - such as rental income, investment income, capital gains, dividends, royalties, or part-time salaries. Your total income is then taxed according to the applicable tax rates.

This is because, although you were saving for retirement, SARS allowed you to claim a tax deduction on your retirement contributions each year. As a result, the income you receive in retirement is now considered taxable.

Let’s look at an example:

Sarah, 21, just started working and decided to contribute R1000 toward a retirement annuity fund (RA). She also pays R1000 toward her company’s pension fund each month. On her first assessment, SARS gives her a tax deduction of R12000 for the retirement annuity and R12000 for the pension fund contributions she made.

At 55, Sarah retires and is due a lump sum of R408000 from her retirement annuity. She receives the 1/3 savings pot as a lump sum and agrees that the retirement annuity fund will pay her a monthly income amounting to R850 each month for 10 years.

Sarah is due to pay tax on the lump sum and the monthly retirement annuity income as her contributions toward the fund was already granted as a tax deduction over the years.

It should be noted that retirement funding income is taxed in the hands of the investor and their beneficiaries. 

Some death benefits are setup to pay the beneficiaries a monthly amount instead of a once off lump sum, in this instance the additional income would also be taxed at the recipient’s marginal rate thus increasing their tax liability.

Likewise, if a will has a clause stating that the beneficiary’s inheritance should be saved up in a trust, and the tax will not be borne by the trust (i.e. trustees chose to vest the income to the beneficiaries), the beneficiaries will then need to make provision for the tax due on this income too.

How does one deal with the additional tax liability?

There are a few ways to deal with the tax deficit.

• The first would be to register for Provisional Tax with SARS. Provisional tax is a way of pre-empting the tax shortfall and paying it upfront, please see our Provisional Tax Guide.
• You can also setup a Payment Arrangement with SARS, this will prevent your Income tax account balance from growing each year and you can agree on an amount that you are comfortable with. You can follow these steps Guide to setup a Payment Arrangement with SARS
• Increase your Investments and pay the tax shortfall with the interest earned. This is however a difficult option as increasing your investment would also increase your tax liability. It would help to contact your banker and ask them to check what the return on your investment would be and compare it to your tax liability in the previous tax year. If the return on your investment matches the tax deficit, please ask your banker to allow you to withdraw the interest a few days before the second due date on your assessment each year.
• Another option would be to increase or take out a Retirement Annuity. Discuss this option with your financial advisor and ask them to suggest a contribution which would help decrease the additional tax you might have to pay once you receive the monthly payments.
• Start making Donations to SARS registered PBO’s as you should receive a 10% deduction for this, please see our Donations Tax Guide
• Claim all your tax-deductible expenses and be proactive in your record keeping. As a salaried employee you can still claim a deduction for your Home Office Expenses if you work from home more than 50% of the time, you can also claim Depreciation for any personal assets you use for work purposes and if you receive a Travel Allowance, ensure that your Logbook is up to date.

 With all these options, it is quite easy to stay ahead of your taxes, but if you need a little help, please reach out to our help desk 😊