Out to pasture

Retirement planning is a key component of any financial plan. As spouses are taxed separately from one another, a husband and wife saving independently towards retirement will be able to take maximum advantage of the tax concessions available to retirement funding in South Africa.

An example of this would be for each spouse to claim the maximum deduction for contributions made to Retirement Annuities and other retirement funds. This improves the tax effectiveness of the couple’s savings. Furthermore, each spouse qualifies for tax relief on their income, and it is therefore far more tax effective for a couple to each accumulate retirement funds separately, rather than having only the major breadwinner take on this responsibility. This principle is illustrated below. Other points to consider: * After age 65, both spouses can claim a tax exemption of the first R33,000 of any interest earned, IN ADDITION to the “threshold” amount above. Spouses married in community of property are liable to each declare one-half of their combined interest earnings? After age 65, taxpayers may claim their qualifying medical expenses in full as a tax deduction. If only one spouse is 65 years or over, it could be prudent for that spouse to pay for all medical expenses incurred by both spouses, as the payer spouse may then claim the combined qualifying expenses as a tax deduction without limitation.

* After age 65 both spouses qualify for increased rebates on their income tax. For the current tax year (2011/12) EACH spouse can earn up to R93,150 tax-free (this is the “tax threshold” for taxpayers between 65 and 75 years in South Africa) * Warning: Remember that the anti-avoidance provisions of the Income Tax Act may be used where spouses transfer assets to each other purely to avoid or reduce tax. Retirement assets should be legitimately built up over time in each spouse’s estate.

 

Retirement savings accumulated in one spouse’s estate only: Assume R2 million in a retirement fund at age 65 invested to provide a taxable income of R15,000 p/month Calculation of monthly after-tax income: Monthly taxable income            R 15000 Less tax as per 2011/12 tables       1477 Monthly after tax income           R13,523  

Retirement savings accumulated in both spouse’s estates: Assume R1 million in a retirement fund for each spouse at age 65 invested to provide a taxable income of R7,500 p/month Calculation of monthly after-tax income: Monthly taxable income (each):           R7500 Less tax as per 2011/12 tables:          nil Monthly after tax income (each):         R7500

Combined monthly after tax income: R15000