RA: A good estate planning tool

The opportunity to make additional provision for retirement, with the potential for tax and estate duty savings, will ensure the continued popularity of retirement annuities as an estate planning tool, writes Tiny Carroll, estate planner, Glacier by Sanlam

A retirement tool

• It is well known that the contributions to a retirement annuity are tax deductible. What is less well known is that certain retirement annuities provide the member with access to a portfolio of shares managed by a stockbroker. Seen in this light, the retirement annuity contribution can be compared to a direct investment into a portfolio of shares on the JSE, at a 40% discount.
• Profits made on share trades are also exempt from capital gains tax.
• After retirement from the retirement annuity — where a living annuity is chosen — the annuitant can regulate the income flow to suit a person’s income requirements and income tax obligations. Annuities can be regulated between the current minimum, 2.5%, and the maximum of 17.5%. Unlike with other income-generating investments, surplus income does not accrue to the annuitant but continues to grow, tax-free, in the fund underlying the annuity.
• Emigration is often a consideration in estate planning. Benefits within a retirement annuity fund may be withdrawn on proof of formal emigration. The withdrawal amount, in excess of the R22 500 tax-free amount, will be subject to income tax according to the fixed scales applicable to all retirement fund benefits.

For example, if a client makes a R200 000 contribution to a retirement annuity and claims a 40% tax deduction, the actual cost is R120 000. Assume that the amount is invested for five years and the fund grows at 10% a year. The fund value will be R322 102. At that point the client decides to emigrate and withdraw the benefits from the fund.

Benefit: R322 102
Tax-free: R22 500
Taxable: R299 602
Less tax at 18%: R53 928*

*Subject to the rules of the retirement annuity fund allowing for such a withdrawal.

• With the amendments to the Income Tax Act this year the maximum retirement age (69 at last birthday) was abolished.

This has two immediate implications:

• A member need never retire from a retirement annuity. So the income for the surviving spouse/beneficiaries can be postponed until after the planner’s death; and
• A new retirement annuity market has opened for clients who are older than 70 but who still require tax relief or who simply wish to remove assets from their estate for estate duty purposes.

(Note that this is applicable only in respect of retirement annuity funds the rules of which have been amended to allow for such a withdrawal.)

Managing estate duty

• From an estate duty perspective, the amount contributed to a retirement annuity is immediately removed from your estate. Both the lump sum (accruing after January 1 2009) and the annuity are not subject to estate duty.
• Contributions to a retirement annuity, as opposed to donating the amount to a trust, will allow the money to be taken out of the estate without attracting donations tax, but with the added benefit of an income tax deduction.
• Individuals are allowed to donate up to R100 000 per tax year (R200 000 for couples) without incurring any liability for donations tax.

However donating assets to a trust will trigger anti-avoidance provisions in the Income Tax Act; income that arises in the trust may be taxed in the hands of the person who donated assets to the trust. In addition, investments within a trust don’t qualify for interest exceptions.

Had the build-up taken place in the investor’s estate, the pay-out could potentially be reduced by up to 20%, which is the current estate duty rate.

Q&A
A reader asks: I’m leaving my present company. How much can I withdraw from my retirement fund, tax-free, as a once-off?

Answer: Legislation that came into effect on March 1 allows individuals to withdraw a lump-sum of up to R22 500, tax-free. The balance will be taxed in terms of the new tables for withdrawal benefits as follows:

• R0 to R22 500, not taxable;
• R22 501 to R600 000, 18% on the amount above R22 500;
• R600 001 to R900 000, R103 950 + 27% of the amount above R600 000; and
• R900 001 and above, R184 950 + 36% of the amount above R900 000.

You have to remember that this is a once-off cumulative concession. The amount withdrawn from a retirement fund before actual retirement date will reduce the tax-free amount available on retirement. This applies to all amounts withdrawn and not only the tax-free amount of R22 500. Investors will essentially be faced with a form of double taxation.

By way of an example: a withdrawal of R300 000 will use up the entire tax-free concession at retirement, despite being taxed upon withdrawal. Consideration should rather be given to preserving benefits at withdrawal through a preservation fund or RA.

The purpose of the new legislation is to encourage investors to preserve their retirement fund benefits and not cash in their savings before retirement date, and risk becoming a burden to others.

Matter of fact: The amount of R1 705 referred to in the previous Q&A on February 6 should have been R1 750.