BJM PCS salutes taxman over new deal for retirees
Retirement planners at BJM Private Client Services today (Friday, October, 19) saluted the South African Revenue Service (SARS) over the application of new tax rules for retirees.
The simplified system that came into effect this month (October) is "simpler, fairer and better suited to the needs of those with plenty of living left to do", says Alan Botha, head of wealth management at BJM PCS Gauteng.
Under reforms announced in the last Budget, the first R300 000 of a lump sum withdrawn at retirement from a pension, provident, preservation or retirement annuity fund is tax free.
The next cash pay-out (R300 001 to R600 000) is taxed at 18% while the next or third pay-out (R600 001 to R900 000) attracts tax of 27%. All lump sum withdrawals above R900 000 are taxed at 36%.
Previously the tax-free portion was the greater of R120 000 or R4500 multiplied by the number of years of an individual's retirement fund membership. Overall tax exposure on retirement was calculated at the rate applicable to a persons average income over the final two years of employment.
The R120 000 threshold was set in 1986 and despite prolonged periods of double-digit inflation over the next 20 years was never adjusted.
As before, the maximum lump sum cannot exceed one-third of the total entitlement. The remainder must be used to buy an annuity.
BJM PCS is a wealth adviser and investment manager to some of the countrys richest individuals and families. The longstanding unfairness of tax rules at retirement meant that its teams sometimes engaged in elaborate financial structuring ahead of a senior executives retirement to ensure legal compliance and tax efficiency.
"The old rules created first and second class retirees," says Alan Botha. "The first class retirees were those who could afford expert advice to achieve a tax efficient end-result. The second class retiree simply worked until the end of his or her service and then felt the full weight of an onerous system.
"From October 1, the tax planning role has shifted from elaborate pre-planning of deferred compensation mechanisms into much more socially beneficial channels focused on long-term quality of life backed by appropriate financial resources.
"This is what retirement planning should be about at a time when improvements in health and nutrition have created a reasonable expectation of active retirement into a persons eighties and nineties."
The key issue in the new retirement tax era is the optimum split between the cash lump sum and the amount committed to a living annuity to assure a comfortable income for the 'golden years'.
Botha explains: "Improved tax breaks on the lump sum component can tempt a retiree into taking a bigger chunk of his entitlement in cash. It is important to do the math in every case, but in general our advice is to beef up the living annuity.
"We recently modelled a scenario for a high net worth individual to demonstrate that tax impacts should no longer be the sole or chief criterion. We showed that even though he could achieve the same tax result by taking a higher cash sum, his income would last six years longer by a higher commitment to a living annuity. In this case, the income stretched to the age of 92 rather than 86.
"This type of scenario-planning is beneficial for both the individual and the state as personal provision for a prolonged retirement reduces ones reliance on state resources late in life. It's win-win."
