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Retirement Planning
Wednesday, August 1, 2007
Fears unfounded

There seems to be some confusion relating to the treatment of lump sums on retirement. This follows the recent proposals by the SA Revenue Services (SARS) embodied in the Taxation Laws Amendment Bill of June 2007.

The confusion seems to stem from the new tax rate table contained in the Bill. However, says Johan Troskie, Director of Deneys Reitz Tax Services, “Fears that changes to the taxation of lump-sum benefits could force employees to retire early are unfounded when the new formulas proposed by SARS are properly studied.”
The previously complex calculations of the tax payable on the lump sum portion of a retirement fund are to be replaced by a quantum-based tax rate. “The changes are far reaching but contrary to the prevailing fears, I think the new rates will actually lead to a lower tax rate of retirement funds overall,” he asserts.
Most of new provisions will come into effect on 1st October 2007 and will apply to the tax year ending 28th February 2008.
For one thing, the new rates are simpler and it is easier to determine the tax liability. “I think we will have to conduct detailed calculations to compare the new regime with the old to see whether the proposed exemption and rates are significantly lower than in the past,” he says. “But I have a feeling the overall rates will work out lower. I don’t believe the rates are excessive in the sense that we will be seeing hoards of people queuing for retirement.”
He adds that up to now, SARS allowed a tax-free portion of lump sum benefit, which amounted to a minimum of R120 000. The balance of tax on the retirement fund was subject to a rather cumbersome calculation based on employment related information, such as years of employment and average salary of the last five years. The tax-free portion of the lump sum has been increased to R300 000.
A second R300 000 portion of the lump sum will be taxed at a flat rate of 18%. In effect a tax rate of only 9% would be applied to the first R600 000. However, the next portion of the R300 000 will be taxed at a rate of 27% - plus an amount of R54 000. Lastly, the amount exceeding R900 000 will be taxed at an amount of R135 000 plus 36% on the amount exceeding R900 000.
In the example where one retires with an amount of R1,5m, one’s tax rate shows that the first R300 000 will be tax free. This leaves R1,2m to be taxed as follows:
• R135 000 plus 36% of R600 000, which totals R351 000;
• This means the retirement amount of R1,5m is taxed at an effective rate of 23,4%.

In another example of a person retiring with an amount of R600 000:
• the first R300 000 is tax free, and:
• The next R300 000 is taxed at 18%, which is R54 000;
• The effective tax rate on R600 000 is therefore 9%.

Another example where one retires with an amount of R900 000 works out like this:
• again the first R300 000 is tax free, and the balance of R600 000 is taxed as follows:
• R54 000 plus 27% of the amount of R300 000, which is R81 000;
• The total then is R135 000 and the effective tax rate is therefore 15%.

A person retiring from a pension or retirement annuity fund will still be able to withdraw one third of the amount standing to his or her credit in the fund. However, it has been found that, where this balance is less than R50 000, the cost of administration makes it uneconomical to invest such a sum in an annuity, as R50 000 buys an annuity of only R4 500 per annum. Consequently it is now provided that, where the balance after withdrawing one third does not exceed R50 000, it may be paid out in full. What this amounts to is that a person whose balance in a fund does not exceed R75 000 may withdraw the entire amount.

Copyright © Insurance Times and Investments® Vol:20.7 1st August, 2007
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