In the past decade, retirement planning has undergone a significant transformation. No longer is it simply about fading into the background in one’s later years. Instead, retirement has taken on a fashionable makeover, with a focus on vibrant and fulfilling lifestyles. The allure of exclusive lifestyle estates, where those over the age of 55 eagerly vie for entry, is a testament to this evolving trend. Today, achieving a stress-free retirement is a serious endeavour, one that demands meticulous forethought and financial prudence.
In this complex landscape, the importance of starting retirement planning well before the age of 50 cannot be overstated. Moreover, proactive financial planning can go beyond the basics, offering opportunities to maximise income and minimise tax burdens during retirement. In this article, we uncover a few tax tips to incorporate into the modern face of retirement planning, where embracing a fulfilling post-work life is just the beginning of the journey.
Tax benefits for retired individuals
Morné Janse van Rensburg, Managing Director at Hobbs Sinclair, emphasises the importance of understanding the tax advantages available to individuals aged 65 and older. He states, “Given the potential length of retirement (and the pursuit of blue-zone living), understanding the impact of taxes on your financial well-being is as crucial as it was during your saving years.” Janse van Rensburg adds, “The good news is that, upon retirement, there may be opportunities to enhance your after-tax income,” as he outlines these opportunities below.
For individuals below the age of 65, a local interest exemption of R23,800 per tax year applies. Suppose, for example, you earned R50,000 in local interest during the 2024 tax year. In this case, the first R23,800 remains exempt, with only the remaining R26,200 subject to Income Tax.
Once you turn 65, the exemption increases to R34,500. This means that individuals over 65 can receive interest of up to R2,875 per month tax-free (excluding personal tax rebates). When withdrawing your lump sum from your pension or retirement annuity fund, consider investing a portion in an interest-bearing account to maximise your tax-free income post-retirement.
Adjusted tax thresholds
In the 2024 tax year, the tax threshold for individuals below 65 is R95,750. This signifies that if an individual’s taxable income remains at R95,750 or lower, they won’t incur any Income Tax. However, for those aged 65 and above, the threshold rises to R148,217. Consequently, an individual in this age group can receive an income of up to R12,351 per month without incurring Income Tax.
Moreover, upon reaching the age of 75 and above, the threshold expands further to R165,689, equating to R13,807 per month.
Additional medical tax credit
Individuals aged 65 and above are entitled to an additional medical expenses tax credit, based on medical expenses not covered by their medical aid. This includes doctor’s fees, medication costs, optometrist fees, physiotherapist fees, nursing assistant fees, and hospital charges.
Monthly withdrawals from investment portfolios
Withdrawals from unit trust investment portfolios are an excellent source of retirement income, and the good news is that SARS doesn’t view these withdrawals as taxable income. While you may be liable for Income Tax on capital gains, dividends, or interest from the portfolio, the tax rates are typically lower than those for ordinary income.
Tax-free savings accounts, introduced by SARS in 2015, offer another avenue for tax-free income in retirement. Currently, you can invest a maximum of R36,000 per tax year and a lifetime total of R500,000. Interest earned within these accounts is exempt from Income Tax.
Donations to a spouse
Donations between spouses remain exempt from donations tax under section 56(1)(b) of the Income Tax Act, a valuable consideration for estate planning. Therefore, you can donate an unlimited amount of your assets to your spouse without having to pay any Donations Tax.
Each individual also has an annual R100,000 Donations Tax exemption whereby you are able to donate up to R100,000 in cash or assets to anyone else (individuals, companies, trusts etc.) free of Donations Tax. Note however that you can divide and use your annual exemption as you decide so long as your total donations to all recipients do not exceed R100,000 per year. Any donations above the exemption limit will be subject to Donations Tax of 20%.
This is a popular method of passing inheritances earlier to your heirs while you are still alive – commonly known in practice as ‘gifting assets with warm hands.’
Estate Duty reduction
Various deductions can be employed to reduce Estate Duty, such as bequests made to Public Benefit Organisations (PBOs) or PBO-registered charities, which can diminish the taxable value of an estate.
The timing of withdrawals from different investments during retirement can have significant tax implications. It is vital to take a thoughtful approach to tax management and seek advice from a tax or financial advisor to chart a course of action aligned with your financial goals.
The changing face of retirement planning has ushered in a new era, one that emphasises both lifestyle fulfilment and financial security. Whether you’re eyeing those coveted lifestyle estates or exploring other retirement options, it’s important to remember that meticulous financial planning and early preparation are your best allies. Moreover, as Janse van Rensburg explains, “By leveraging the available tax-smart opportunities provided by SARS for pensioners, you can significantly reduce your tax burden and unlock additional retirement income.”