Retirees in South Africa are often faced with the challenge of managing their pension savings to ensure they last. According to Natasha Huggett-Henchie, a consulting actuary at NMG Benefits, understanding tax rules and choosing the right retirement products are crucial to protecting one's money. The South African Revenue Service (Sars) treats monthly pension payments as regular taxable income, with certain income thresholds being tax-free depending on age.
Individuals younger than 65 can earn up to R99,000 a year without paying income tax, while those aged between 65 and 74 have a threshold of R153,250, and those aged 75 and older have a threshold of R171,300. Once the annual income exceeds the applicable threshold, tax becomes payable. For example, someone receiving R10,000 a month, or R120,000 a year, would pay R3,780 in tax, while a monthly income of R15,000, amounting to R180,000 a year, would attract R15,240 in tax.
Retirees should therefore calculate their income after tax rather than budgeting around their gross pension income. Another costly mistake is withdrawing too much money as a lump sum when retiring. Retirees can withdraw up to R550,000 tax-free, while amounts above this, up to R770,000, are taxed at 18%, with higher withdrawals attracting higher tax rates. Withdrawing R770,000, for instance, would result in a tax bill of R39,600, leaving the retiree with R730,400.
Huggett-Henchie advises taking only the R550,000 tax-free portion and investing the remaining money in a product that generates an income. Retirees must also understand the difference between the two main products available when they leave employment: a living annuity and a life annuity. A living annuity allows retirees to invest their retirement capital and draw a monthly income, but if withdrawals are higher than the returns earned by the investment, the capital will gradually decrease.
A life annuity, on the other hand, guarantees a monthly income for life, but the product does not leave capital for heirs. Huggett-Henchie recommends combining the two options, putting 20%-40% of savings into a life annuity to cover basic living expenses and the remainder into a living annuity for non-essential spending. Planning should begin long before retirement, with workers advised to pay off debts, increase retirement contributions, and adjust their lifestyle to prepare for a lower income.
Medical expenses are another consideration, with retirees advised to consider joining a private medical scheme, even if it is a basic option. The SA Social Security Agency (Sassa) older person's grant, currently paying R2,320 a month to people aged between 60 and 74, and R2,340 to those aged 75 and older, is far below what most people need to live comfortably. Seeking professional advice three to five years before retirement can help workers understand their options and develop a plan for their future income.
A sensible retirement plan should aim to replace 75% of a person's monthly working income. Huggett-Henchie emphasizes that retirement should not mean the end of earning, but rather the beginning of making every rand count. The choices made in the years leading up to retirement determine whether savings will provide financial freedom or cause stress.
Key points
- Understanding tax rules and income thresholds is crucial for retirees to protect their pension savings.
- Retirees should consider combining a living annuity and a life annuity to cover basic expenses and non-essential spending.
- Planning for retirement should begin at least three to five years before retiring, with professional advice recommended.
