When drawing from your retirement annuity (RA) at retirement, you can use a few strategies and tax-efficient options to minimise or defer your tax liabilities. While there isn’t a way to eliminate all taxes, a few methods exist to optimise your withdrawals and use tax-free or tax-efficient investment vehicles for subsequent growth.

 

Let’s break down these strategies:

  1. Understanding the tax-free portion at retirement

Upon retirement, you can take a portion of your RA as a lump sum, and the rest must be used to purchase an annuity that will provide you with a regular income.

Lump sum withdrawal at retirement:

The first R550 000 of your lump sum withdrawal is tax-free. This is applicable if you haven’t previously utilised this tax-free amount in any other retirement withdrawal (e.g., withdrawals from a provident or pension fund).

Tax on lump sum withdrawals (2024 table):

  • R0 – R550 000: 0% (tax-free);
  • R550 001 – R770 000: 18%;
  • R770 001 – R1 155 000: 27%; and
  • Above R1 155 001: 36%.
  1. How to maximise tax-free amounts and minimise Sars taxes

To minimise taxes when withdrawing from your RA, you can:

  • Use the tax-free lump sum efficiently: Take advantage of the R550 000 tax-free portion. You can withdraw the entire amount tax-free if your RA is relatively small and within the de minimis threshold (R247 500 or less).
  • Avoid excessive lump sum withdrawals: Any amount above R550 000 will be subject to tax, so consider withdrawing only up to R550 000 as a lump sum and using the remainder to purchase a living annuity or other tax-efficient investments.
  1. Tax-free and tax-efficient investment options after RA withdrawal

Once you have withdrawn from your RA, you can reinvest the proceeds in other tax-efficient vehicles:

  1. a) Tax-free savings account (TFSA)
  • You can invest up to R36 000 annually (as of 2024) in a TFSA with a lifetime limit of R500 000. All growth within a TFSA is tax-free – this includes interest, dividends, and capital gains.
  • While the contribution limits are relatively low compared to your expected lump sum withdrawal, it is an excellent way to reinvest a portion of your tax-free amount for additional growth.
  1. b) RA rollover to a living annuity
  • If you use your RA to purchase a living annuity, any growth within the living annuity is tax-free. This means no tax on interest, dividends, or capital gains while the funds are invested in the annuity.
  • You only pay tax on the income you draw from the living annuity, and you can control the drawdown rate (between 2.5% and 17.5%), allowing for tax-efficient income management.
  1. c) Reinvesting in discretionary investments
  • After withdrawing the lump sum, you can reinvest the amount in discretionary investments, such as unit trusts or balanced funds. While these investments are subject to tax, you can reduce the impact by structuring withdrawals to stay within lower tax brackets and utilising capital gains tax exclusions.
  1. d) Endowment policies
  • If you are in a high-income tax bracket, endowment policies can be tax-efficient investment vehicles. The tax within the policy is levied at a flat rate of 30% on interest income and 12% on capital gains, which may be lower than your marginal tax rate.
  • Endowment policies also benefit from protecting your investment from creditors and estate duty, making them suitable for legacy planning.
  1. Strategies for minimising tax on RA withdrawals and subsequent investments

Strategy 1: Partial lump sum withdrawal

  • Withdraw only R550 000 as a lump sum to maximise the tax-free portion.
  • Purchase a living annuity with the remaining funds to benefit from tax-free growth within the annuity and control your income drawdown.

Strategy 2: Living annuity with a low drawdown rate

  • Choosing a living annuity with a low drawdown rate (e.g. 2.5%) minimises the taxable income while allowing your funds to grow within the annuity tax-free.

Strategy 3: Reinvestment into a TFSA and balanced fund

  • Use the lump sum (up to R550 000) to maximise your annual TFSA contributions.
  • Invest any additional lump sum in a balanced fund within a discretionary account, taking advantage of the annual capital gains tax exclusion (R40 000 per year as of 2024).
  1. Example scenario: Applying the strategy

Let’s assume your total RA value is R2 million at retirement.

  1. Take R550 000 as a tax-free lump sum: You can take R550 000 tax-free, leaving you with R1.45 million to invest in a living annuity.
  2. Invest the R550 000 in a TFSA and balanced fund: Contribute R36 000 to a TFSA. Invest the remaining R514 000 in a balanced fund, generating growth with potential tax efficiency.
  3. Purchase a living annuity with R1.45 million: Set the drawdown rate at a conservative 3% (R43 500 annually), which may fall within a lower tax bracket, reducing the overall tax burden.
  4. Manage withdrawals for tax efficiency: Use TFSA withdrawals for tax-free income and draw only the minimum required amount from the living annuity to keep your taxable income low.
  1. Conclusion: Choosing the right strategy

While there are no utterly tax-free investment options when drawing from an RA at retirement, you can use a combination of strategies to minimise your overall tax burden:

  • Maximise the R550 000 tax-free lump sum and reinvest it in a TFSA and other tax-efficient vehicles.
  • Use a living annuity to benefit from tax-free growth on the remaining retirement savings and control your taxable income through a low drawdown rate.
  • Consider discretionary investments or endowment policies for additional growth while maintaining flexibility and tax efficiency.

Implementing these strategies can reduce your tax liability and optimise the post-retirement growth of your savings. Consult a qualified financial planner to ensure your plan is implemented as intended.

Always contact your financial advisor for advice when making important decisions like this.

 

Article credit: https://www.moneyweb.co.za/qa/are-there-tax-free-investment-options-when-drawing-my-ra-at-retirement/