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Ways to save tax on your hard-earned ret... Garbage bag gold for Johannesburg's de... |
Ways to save tax on your hard-earned retirement nest egg
It's getting harder, but it is still possible to hang on to a far greater proportion of your savings THE main consequence of the new tax regime for retirement lump sums that came into effect just over a year ago is that the benefits of the wealthy middle class are taxed far more heavily, while the truly rich have been left a loophole to slip through. You can still reduce the tax rate applicable to the taxable portion of such lump sums to as low as 17% - but it's considerably more difficult. There is also the problem that if retirement is delayed, you could run into a time when the government taxes these lump sums more harshly, as the Katz Commission has recommended. The average rate of tax applied to the taxable portion of retirement lump sums is the higher of the average rate which applied in the tax year prior to your retirement, and the average rate (calculated without the lump sums being taken into account) in the tax year in which you retire. The easier of the two figures to manage downwards is the one for the year in which you retire, as you can probably arrange to do so at the start of the tax year and plan to hold down your taxable income for the rest of that year. Managing downwards your taxable income in the year prior to retirement is more difficult. But it can be done, if planned carefully. Here are some ideas: These losses must be of a kind that are deductible (not a capital expense, for instance); and must occur in a business that you operate on your own account or in partnership (not through a close corporation or company). It may be possible to produce such losses by taking a spouse and/or children into the business, which may be a part-time venture. Their income will be taxable in their hands, but invariably at lower rates than in yours.
Just before the end of the tax year it may be possible to arrange for genuine expenses to be incurred that are immediately deductible, yet whose rewards both lie in the future and cannot be clearly tied to the expenses - such as advertising. The above business loss strategies may also be usefully extended into the second year, the actual year of retirement, if required to bring down the average rate of tax.
Although the amount receiving tax relief will be relatively small if you are a member of a pension or provident fund, in your year of retirement, immediately after going on pension, there is nothing to prevent you from making a single contribution to a retirement annuity fund equivalent to 15% of your taxable income, which will also help to bring down your average rate in that year.
If you face the prospect of major and expensive elective surgery that you will have to pay wholly or partially yourself, you may consider having that done in the year prior to retirement as such expenses are deductible if they exceed 5% of your taxable income if you are under 65. You may also donate up to 2% of your taxable income to universities and certain educational funds, as that is also deductible. Only the truly wealthy can implement a plan to bring down the average rate on retirement lump sums to 17%, but even the less wealthy can reduce their average rate if they work hard at it. When you retire, every little amount that you can keep back from the taxman counts. ¥ Martin Spring is editor of Personal Finance Newsletter
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