Are retirement annuities taxable in South Africa?

10 AUGUST 2023

In this article we examine the various retirement investment vehicles and the significant differences between them.Are retirement annuities taxable in South Africa?Some of the most frequently asked questions by those who are planning for retirement involve whether or not retirement annuities are taxable in South Africa. If so, at which stage does a retirement annuity become taxable, and is there a way to calculate how much you will be taxed? In this article, we aim to not only address these questions but also investigate whether there are different tax rules that apply to income you earn from retirement annuities or a pension or provident fund. However, first things first. Before we can look at the tax implications, it’s important to have a basic understanding of these different retirement plans investment vehicles and what the major differences are between them.

So, what’s the main difference between a pension and a provident fund?

Pension and provident funds typically form part of employee incentive schemes that are arranged by employers to help employees save up for their retirement, and generally both the employee and the employer contribute to them. Previously, the main difference between a pension and provident funds was in the payout upon retirement. With a pension fund, you would get a cash payout in the form of a lump sum plus monthly payments, and with a provident fund, you would receive one lump sum only. However, due to recent changes in the Pension Fund Act that took effect on 1 March 2021, the rules of pension and provident funds are now more or less the same.

How does a retirement annuity differ from pension and provident funds?

Retirement annuities are additional investment vehicles through which you can provide for your retirement. So, practically speaking, you could be a member of a pension or provident fund coordinated by your employer and have a retirement annuity. Also, if your employer does not provide any retirement benefits at all, or if you are self-employed, you can take out a retirement annuity to make your own provision. When your retirement annuity pays out, you can also opt for a lump sum, but you must invest at least two-thirds in an annuity, to provide for a monthly income as well. Unlike a pension or provident fund, however, you cannot cash your annuity in before you retire, the minimum age for which is 55.

Are retirement annuities taxable in South Africa?

There are several advantages to investing in a retirement annuity in South Africa. Firstly, your investment enjoys completely tax-free growth, as you don’t pay any tax on it from the moment you take it out, up until your actual retirement date. Secondly, the contributions you make to a retirement annuity are fully deductible from your taxable income which is, of course, all the cash payments you receive in exchange for services. As soon as you do retire though, the cash payout you receive from your retirement annuity does become taxable, but you pay significantly less tax than what you would have paid on other types of investments.

How are taxes calculated on my retirement annuity?

In South Africa, you are taxed on both components of your retirement annuity that pay out when you retire; the lump sum that is paid out in cash, as well as the two-thirds you receive in the form of a monthly pension or annuity. Regarding the lump sum, you are taxed on the gross total, but you are only taxed on the amounts that exceed the threshold, which is currently R500K (as determined by SARS). Plus, you will also be able to deduct any other contributions that you’ve made to retirement funds from this total lump sum, as long as these retirements did not previously rank for tax, or were not exempted from normal tax before. Similarly, when it comes to the monthly pension you receive from your retirement annuity, you only have to start paying taxes on it, when the amount exceeds the annual tax threshold.

How do I calculate the taxes payable on my retirement annuity in South Africa?

Since 2020, SARS has been calculating the taxes payable on lump sums on the following figures:

  • R1 – R500,000: 0% of taxable income
  • R500,000 – R700,00: 18% of taxable income
  • R700,000 – R1,050,000: R36,000 plus 27% of taxable income above R700,000
  • R1,050,000 and above: R130,500 plus 36% of taxable income above R1,050,000

The annual tax threshold for the monthly pension for the latest financial year from 1 March to 28 February 2023 is as follows:

  • Person below the age of 65 | R91 250 per annum
  • Person aged 65 -74 | R141 250
  • Person aged 75+ | R157 900

Start saving for your retirement today and start enjoying the tax benefits immediately

When you contribute towards any of the legally approved retirement investment vehicles; regardless of whether it is a pension or provident fund or a retirement annuity, you automatically qualify for a deduction of 27.5% on your gross annual taxable income. Simply put, when you save smartly for your retirement, you can enjoy both peace of mind and tax benefits. Win-win. However, the best time to secure the carefree financial future of tomorrow is by starting to save today. Here are some more tips on investing.