Optimize Your Retirement Income: Tax-Reduction Strategies for Success
You’ve put in the effort and saved diligently for the retirement you’ve always envisioned. As you transition from your career or commit to your side hustle full-time, it’s essential to ensure your savings work as hard for you as you have for them. By structuring your retirement income effectively, you can retain more of your hard-earned money while supporting your loved ones.
Taxes and Retirement Savings
In South Africa, generous tax incentives are available for those saving for retirement. Contributions to retirement annuities, pensions, and provident funds are tax-deductible (within annual limits), and any growth within these funds is tax-sheltered. Tax-free savings accounts (TFSAs) also play a crucial role: although there are caps, all growth and withdrawals are tax-exempt.
A Treasury analysis demonstrates the strength of these incentives: after a decade, R10,000 invested in a retirement fund may yield about R7,500 more than that same amount in a TFSA, nearly doubling the returns of a conventional interest-bearing account.
However, once you begin withdrawing income, the situation shifts. Fareeya Adam, CEO of Structured Products and Annuities at Momentum Wealth, emphasizes the importance of understanding tax implications on your retirement income. Income derived from compulsory-purchased annuities is fully taxed at your marginal rate, similar to a salary, while only the interest portion of a voluntary-purchased annuity may be taxable, resulting in little or no tax liability when utilized in retirement.
Compulsory vs. Discretionary Annuities: Different Tax Regulations
The taxation of your annuity income is contingent on whether it is sourced from compulsory retirement savings or discretionary (personal) savings. This distinction is important and follows different sections of South Africa’s tax legislation.
- Compulsory Annuities: Acquired using savings from retirement funds such as pension, provident, preservation funds, or retirement annuities. These fall under the Income Tax Act provisions governing retirement savings, meaning the income received is taxed at your marginal rate, like salary income. Interestingly, the tax threshold for individuals over 65 is significantly higher than for those younger than 65 (for the 2025/2026 tax year: R148,217 for those over 65 versus R95,750).
- Voluntary (Discretionary) Annuities: Purchased with after-tax income outside of retirement funds. Section 10A of the Income Tax Act may apply here, permitting only the interest income to be taxed. The capital portion remains tax-free, often leading to little or no tax due for retirees aged 60 and above.
To illustrate this impact, consider a retiree earning a pre-tax income of R60,000 monthly. For a compulsory annuity, this retiree would face a 24% tax rate, resulting in a tax of R14,233 for a person aged 65 to 74, leaving them with a net monthly income of R45,767. In contrast, for a voluntary annuity, assuming Section 10A applies and the interest portion is R31,786, their monthly income would increase to R55,494.
This represents a monthly take-home income difference of R9,727 simply due to differing tax treatments.
| Feature | Compulsory Annuity | Voluntary (Discretionary) Annuity |
|---|---|---|
| Source of Funds | Retirement fund savings (RA, pension, provident, preservation) | After-tax discretionary savings |
| Legislation | Income Tax Act – compulsory retirement provisions | Section 10A of the Income Tax Act |
| Tax on Income | Full income taxed at your marginal rate | Only the interest portion is taxed |
Income and Legacy: Merging a Life Annuity with Life Insurance
While it’s crucial to understand these tax distinctions for financial security, many retirees are equally concerned about establishing a financial legacy. Momentum Wealth’s Capital Protector is designed to effectively balance income security with legacy planning.
“The Capital Protector is a back-to-back product – it combines a life annuity with life cover. A notable feature of this life cover is that there’s no underwriting involved, meaning no medical tests or questions are required,” explains Adam. This structure allows clients to secure guaranteed income while ensuring a lump sum will be passed on to their beneficiaries.
Importantly, Momentum has introduced lifetime guaranteed premiums for clients aged 60 and over. “This means that the premium stated at the beginning of the policy remains the same for the lifetime of the client, adding certainty to their financial future,” Adam notes.
Estate Planning and Wealth Transfer
Beyond considerations of income and tax, estate planning is essential. Upon death, annuities are handled differently based on their structure. With a life annuity, payments typically cease upon the annuitant’s death unless a joint life or guaranteed term option was selected, which allows income to continue to a spouse or for the remainder of the guaranteed period.
Should the income continue to a spouse, Section 10A ensures favorable tax treatment applies, with only the interest portion being taxable if it’s a voluntary annuity. Conversely, if the income is distributed to someone other than a spouse, the entire sum becomes taxable in their name.
The life cover payout from the Capital Protector aids in preserving wealth for future generations.
“If the beneficiary is a legally defined spouse or partner, executor’s fees and estate duties are waived,” Adam points out. Given that estate duty stands at 20%, this can represent a substantial advantage. Even when the beneficiary is not a spouse, executor’s fees can be avoided as the lump sum is paid directly, although estate duty still applies.
The Value of Personalized Advice
Deciding on annuities, tax structures, and estate planning is rarely a one-size-fits-all process. Individual circumstances, health conditions, family dynamics, spending priorities, and future uncertainties like medical expenses all come into play. This is why Adam emphasizes the need for tailored advice.
“Your situation at age 60 may look different at age 70,” she asserts. Retirement is a dynamic journey; needs and priorities may shift over time, making ongoing advice vital to navigate these changes effectively.
Presented by Momentum Wealth.
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