MONEY BASICS
MARTIN HESSE
One would think the government would have more sympathy for pensioners by allowing them to live tax-free – after all, they have been paying tax throughout their working lives!
Sadly, pensioners who are earning above a certain minimum amount are obliged to pay income tax, just like everyone else. And apart from income tax, there are virtually no concessions for pensioners when it comes to capital gains tax, dividends tax, VAT, or estate duty, to mention some of the other ways the government extracts revenue from its citizens.
That said, the government is not totally unsympathetic, and there are a few important ways in which pensioners can pay less tax, through higher exemptions and thresholds for over-65s.
Let’s look at some of your main taxes and concessions.
Income tax
You pay PAYE on pension income from an annuity provided by a provider such as a life insurance company. If it is a compulsory annuity (one you have to buy with two-thirds of your savings in a retirement fund), you are taxed on the whole amount, in accordance with the SARS income tax tables. You pay income tax because your contributions to your retirement fund during your working life were tax deductible. If it is a voluntary annuity (that is, one that you buy with discretionary savings or from the one-third of your retirement savings you are allowed to take as a lump sum), you only pay tax on that part of your income that derives from investment returns, not from your original capital (because that capital came from after-tax money). Within the annuity investments that are providing your pension, there is no tax on capital gains, dividends or interest.
If you are receiving income from various sources, you will need to register with SARS as a provisional taxpayer, subject to certain thresholds.
For the 2022/23 tax year, the rebate for over-65s (the primary plus secondary rebates) is R25 425. For over-75s this rises (primary plus secondary plus tertiary rebates) to R28 422.
This equates to tax thresholds (the amount of annual income below which you do not pay tax) of R141 250 for over-65s and R157 900 for over-75s.
Tax on interest
If you are earning interest on a discretionary investment such as an RSA Retail Savings Bond, bank deposit or interest-bearing unit trust fund, there is a higher exemption for over-65s: R34 500 (for under-65s it is R23 800). In other words, if, for example, you earned R100 000 in interest from a fixed deposit, R34 500 would be tax-free and the remainder (R65 500), would need to be added to your total taxable income for the year, on which you will be taxed according to the SARS income tax tables.
Capital gains tax (CGT)
There are no CGT concessions for over-65s, except that you don’t pay CGT on gains within an annuity product. On property and on share-based investments (such as an investment in an equity fund), you pay CGT when you realise a gain – in other words, when you sell the investment or switch funds, say from an equity fund to a balanced fund. On that gain you have an annual exclusion of R40 000. On anything over that, 40% must be added to your taxable income for the year. On your primary residence property, the exclusion is R2 million. Currently, you don’t pay CGT on gains on “personal-use” assets, which include artworks and wine collections.
Estate duty
Estate duty is levied at 20% on estates up to R30 million and at 25% on amounts over R30 million. However, there is an exemption of R3.5 million, meaning essentially that if your estate is below that amount, you do not pay estate duty. This exemption rolls over to the surviving spouse, meaning the estate of the last-dying spouse has an exemption of R7 million minus any of the R3.5 million exemption used by the first dying spouse.
Medical tax credits
One additional concession by SARS to pensioners is that they can claw back higher amounts on medical expenses. Some years ago, the government introduced the medical tax credit system, which is more complicated than the old system of claiming deductions for medical expenses. You get credits in two ways:
1. On contributions to a medical scheme (R347 a month for the taxpayer who pays the medical scheme contributions and for the first dependant such as a spouse, totalling R694, and R234 for any additional dependants). If you are 65 years or older you may also claim 33.3% of your contributions that exceed three times the medical tax credit to which you are entitled. For example, if, as a single person with no dependants, you are contributing R3 000 a month to your medical scheme, you can claim a monthly credit of:
R347 + 33.3% of [R3 000 - (R347 x 3)]
= R347 + 33.3% of [R3 000 - .R1041]
= R347 + 33.3% of R1 959
= R347 + R653
= R1 000
2. On allowable “out-of-pocket” medical expenses not paid for by your medical scheme. If you are 65 years or older you may claim 33.3% of these medical expenses.
Note that you do not deduct these amounts from your taxable income for the year. The credits act like rebates, deducted from the tax amount you owe SARS.
This article appears in the April 2022 edition of IOL’s free digital IOL MONEY magazine, which you can access here.
PERSONAL FINANCE