Tax for Gogo and Gramps
There are very important financial and tax factors to keep in mind when approaching retirement, and thereafter.
Tax savings for pensioners
In South Africa, the government and the South African Revenue Services (SARS) have tax laws to help people who are retired and/or living on pensions.
These changes to the law will apply for the 2019/2020 tax season.
People who are older than 65 can now receive more interest on any money that have invested such as from a pension fund.
People under the age of 65 do not have to pay tax on any amount up to R23 800 per tax year. This is called an interest exemption.
For people over the age of 65, the exemption applies to an even larger amount. If you are in this age group, you will not have to pay tax on interest earned on any amount up to R34 500 per tax year.
People who are under the age of 65 do not have to pay tax if they earn anything less that R78 150 a year. This amount is called a tax threshold.
For people who are over the age of 65 – the news is even better. You will not have to pay tax unless you earn R122 300 or above per tax year or more. This means you can earn an income of up to R10 191 a month completely tax-free.
Furthermore, for people who are 75 years and older, you will not have to pay any tax unless you earn R136 750 or above per year or R11 395 or above per month.
Anyone over the age of 65 will also be given a larger tax credit for certain medical expenses. These expenses include medical aid contributions and any costs that were not paid for by a medical aid and which you therefore had to pay for yourself.
A tax credit is when SARS will not make you pay tax on money spent for certain reasons – like for medical treatment or medicine.
SARS will work out the exact percentage of credit you will get according to what your medical expenses were.
So if you are one of the elders of our nation, remember Legal&Tax Services is your caring and expert companion for all tax topics!
After a lifetime of building up retirement savings you have important choices to make
If you are/were member of a pension fund, you will receive a payment of one third of the fund value in cash as a lump sum payment. The first R500 000 may be tax free, depending whether any lump sums payments were made previously.
Carefully consider what you want to do with this lump sum payment. If you choose to rather take a smaller lump sum, and a bigger amount as a monthly pension, there may be tax implications. Similarly if you purchase an additional monthly annuity, or invest the money and earn interest.
Provident fund payments work slightly different on retirement – either the full amount in the fund will be paid out as a lump sum payment, or a portion, depending on when the age of 55 was reached. This lump sum will also have the exemption of R500 000, plus the contributions you made to the fund up to 28 February 2017. The same as with a pension fund, the tax free amount will depend on whether any previous withdrawals were made before retirement.
- Persons over the age of 65 are liable to pay tax as soon as their income exceeds R122 300.
- Persons over the age of 75 are liable to pay tax as soon as their income exceeds R136 750.
- For a person over 65 the first R34 500 of taxable interest earned is exempt from tax.
The problem of two income sources.
A lot of people are very healthy when they, and continue working, either part time or full time. They will therefore receive a salary, and a monthly pension.
There is also cases where pensioners receive a monthly pension and an annuity, or their pension and a pension from a deceased spouse’s employer. Some pension funds invest at different investment providers, which will generate a separate IRP5 from each investment – effectively the tax man sees this as more than one employer.
In all of these cases each employer will only deduct monthly tax in accordance to the tax tables on that single income only – which may fall under the taxable limit. It is important to remember that for income tax purposes SARS adds all income sources together on the annual assessment, and when this is done the taxable income may exceed the applicable limit.
This may leave a pensioner with a tax deficit – an amount owing to SARS on assessment.
The second important issue to remember is that an annual tax return must be submitted to SARS as soon as there are two or more income sources, irrespective of the amounts earned.
A tax companion by your side
This article is not intended to provide financial advice. Speak to your financial advisor to understand how any investments may impact on you, given your specific circumstances.