How post-retirement annuities are taxed

Under the auspices of the pension fund act, when you retire, a portion of your retirement savings must be used to purchase a post-retirement product that will provide you with an income. 

You can choose either a living- or life annuity, depending on your needs, risk appetite, and the financial position you’re in. 

We consider how each option is taxed, and the steps you can take to reduce your tax liability.

Tip: It’s never too late to start saving for retirement. Find out how to invest in a retirement annuity. 

Why are pensioners taxed?

Post-retirement income is still considered income, and every South African earning above a certain amount is required to pay tax, says Cherise Erasmus, a certified financial planner at Crue Invest.

“There is an income tax threshold for each age bracket, which is specified in the tax table for each financial year. Anything you earn below that threshold won’t be taxed,” she says. 

What is the difference between a life- and living annuity? 

The following table highlights the differences between a living annuity and a life annuity. 

How are life- and living annuities taxed?

You will be taxed according to personal tax tables regardless of whether you have a life- or living annuity.

“Both are compulsory retirement products, so they’re taxed at the same rate,” says Wouter De Witt, co-founder of Gravitas Tax.

As an example, let’s consider a retiree aged 55 years, who chooses to transfer two-thirds of their retirement annuity into a living annuity worth R5,000,000.

At a pre-tax annuity income percentage of 5%, the annual income from this withdrawal will be R250,000 - which is payable at R20,833.33 monthly.

Below is the tax table for the 2024 tax year (1 March 2023 - 29 February 2024):

In our example, the total tax payable on a gross income of R250,000 would be R42,678 + 26% of (R250,000 – R237,100) = R46,032 per year, or R3,836 per month. 

The tax-free threshold for a taxpayer aged 55 years in the 2024 tax year is R95,750. Therefore, the taxpayer can earn up to R 7,976.66 per month before any tax needs to be paid.

Because the retiree is 55 years old and earns more than the threshold in the first bracket, the retiree will be taxed. This is when the primary tax rebate of R 17,235 kicks in.

Thus, the retiree in our example would pay R28,797 in tax for the year, or R2,399.75 a month.

Taxpayers aged between 65 and 75 years qualify for an additional tax rebate, called the secondary rebate, of R9,444, and any taxpayers older than 75 years qualify for a third tax rebate, called the tertiary rebate, of R3,145.

Below, using the same taxable income of R250,000 for the year, you can see how the net income will differ for individuals qualifying for the various rebates.

 
What if you have more than one annuity? 

Erasmus says there is no tax benefit for having more than one annuity, and each service provider is required to report your income to SARS.

With a life annuity, you agree on an annual increase at the start of the contractual period, and what you agree to in the contract influences the initial amount of income you can draw. This cannot be changed.

However, a living annuity has an annual “income anniversary”, meaning you can choose how often and how much you will receive over the next 12 months. The difficulty is estimating how much you will spend during the year. If you draw too much, you’ll be liable for unnecessary tax. 

Erasmus recommends that, if you have multiple living annuities, you retire from each fund at a different time of the year, resulting in multiple anniversary dates. This makes it easier to track expenses and make informed, tax-efficient decisions.

You can also take income upfront for a year as a lump sum, which will help you to provide for both planned and unplanned expenses, especially if you don’t have additional savings.

Tip: Debt can compromise your retirement savings. Regain control with debt consolidation.