Thousands of retirees would have find lower-than-expected pensions in their bank accounts at the end of April owing to higher tax deductions. Thousands more already had this experience at the end of March.

This is because of administrators implementing tax directives issued by the South African Revenue Service (SARS) in an attempt to ensure the correct tax is collected upfront from retirees who receive more than one pension or a pension and salary income.

While in many cases the tax deductions may still be too low, there are a few cases where errors have crept into the tax directives applied to pensions being paid to retirees with more than one income, according to a large retirement fund administrator.

There are mistakes in some of the directives at the lower income levels, says Jenny Gordon, head of technical advice, investments, product and enablement at AlexForbes.

Nazrien Kader, head of tax at Old Mutual, confirmed that some pensioners have highlighted that they do not have any other sources of income and do not understand why an increased rate has been proposed by SARS.

Kader says Old Mutual continues to engage with SARS on the new tax rates and will keep pensioners informed on updates and changes to their policies.

Reasons for high rates

There are, however, also logical explanations for some directives that appear to set the tax rates too high, Gordon says.

The tax rates in the directives have been calculated by SARS based on your aggregated pension and salary income in the last tax year for which you have been assessed.

Most taxpayers earning more than one pension or a pension and salary income, have not had enough Pay as you Earn (PAYE) tax deducted in the past, as each annuity provider or employer applies the tax rates and the tax rebates as if the income they pay you is the only income you are receiving.

This results in you potentially having to pay in tax when your income is combined and your final tax is assessed at the end of the tax year. Many pensioners have found themselves indebted to SARS as a result.

SARS has now considered retirees’ total pension and salary income and instructed annuity providers to deduct tax based on pre-determined fixed tax rates in an effort to prevent this under-recovery of tax. Gordon says SARS has explained that it may have instructed one annuity provider to deduct all the under-recovered tax rather than spreading it across different providers or instructing employers paying those in semi-retirement to change their tax rates.

This means you may be taxed at a fixed rate of more than 45% on one pension – but never more than 50%, she says.

Consider your effective rate

When the tax collected through the fixed rate on your pensions or pension plus other salary income is determined as a percentage of your total income, it should be close to your actual effective tax rate (the average rate of tax you pay on your income when the tax brackets and rebates are applied).

In many cases retirees may over the tax year still be paying too little tax, Angus McDonald, senior policy adviser at the Association for Savings and Investment South Africa, cautions.

He says the fixed tax rates in the directives issued by SARS are based on a retiree’s income in the previous tax year and if a retiree has had an increase in their income this year, the tax deducted may still be too low.

Opting out

SARS has for years been encouraging pensioners to opt for higher upfront tax rates and avoid a debt to the revenue authority on assessment. This has not been successful. It has now asked administrators to apply the fixed rates it has calculated to retirees’ pensions instead.

You do, however, have the option to opt out of the tax rates SARS has calculated for you.

Kader says to date fewer pensioners than expected have opted out of SARS’s fixed rates.

If you opt out of the tax rate SARS has instructed your pension administrator to deduct, you will be warned by the administrator that you must be in a position to pay any tax you owe at the end of the tax year, McDonald says.

If you ignore that warning, do not expect SARS to write off the debt you owe it when you are assessed – the onus is on you to set aside the appropriate tax and to manage your cashflow, he says.

If you choose to opt out, you may ask your pension administrator to tax you as if the income it is paying is your only income, or at a higher PAYE rate that you regard as appropriate.

McDonald says if you opt out, SARS allows the administrators to determine the date from which your choice of tax rate will apply.

Depending on how you have chosen the to opt out from the SARS rate and how the administrator deals with your opt out request, you may owe tax on assessment or be owed a refund.

Before opting out

Before you opt out, ask yourself if the tax that is being deducted is a more accurate reflection of what you should be paying, McDonald says.

If you had to pay in tax at the end of the last tax year, it was in all likelihood because each administrator and employer treated your pension/s and salary income as your only income, he says.

Work out, or get your financial or tax adviser to help you work out what your combined pension and salary income from all sources for the year will be. Then apply the tax rates, rebates and the expected medical tax credits for your age to determine how much tax you will be liable for.

Compare that to what is being deducted from your pension/s and salary now, he says. Remember if you opt out of allowing your administrator to deduct the fixed tax rate from your pension, you have to set aside money to pay any tax that may be due to SARS on assessment at the end of the tax year, McDonald says.

If you are unable to do so, it will be better to allow the administrator to deduct tax at the SARS fixed rate from your pension and to adapt to the lower monthly payment, he says.

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