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How can I access my R600k RA tax free?

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A Fin24 user who has contributed more than 15% of taxable income into a retirement annuity seeks advice on the best option to access the funds at retirement. He writes:

After many years of contributing more than the allowed 15% of taxable income into my Retirement Annuities I built up a credit of R600 000. 

Please advise whether I can utilise this when retiring, in the form of tax free lump sum or if not what the available options are.

Neither I nor the administrator of the fund can get a definite answer from SARS's call centre staff.

Erich Bell from South African Institute of Tax Professionals responds:

In our response we will use the phrase the “excess amount”.  The “excess amount” is essentially the aggregate of the amounts contributed to the fund that did not qualify for a deduction against taxable income because it exceeded the 15% limit.

We will also only addresses the tax consequences at retirement and the annuity thereafter.

If the excess amount is more than the lump sum (in other words a new excess amount arises) this excess will (in a sense) reduce the annuity (bought with the two-thirds amount). You will then be taxes on the reduced amount. 

This would then mean that the lump sum benefit received at retirement was less than R600 000.

This excess amount can be deducted against the lump sum (the one-third amount) benefit derived in consequence of or following upon your retirement.

So for instance, if your lump sum benefit (or the one-third amount) at retirement is R1 750 000 then only R1 150 000 (R1750 000 less R600 000 [the excess amount]) will be subject to the tax on lump sums.

Rule of law

In terms of the Second Schedule of the Income Tax Act, the "excess amount" will be used to reduce the lump sum, both on retirement or withdrawal from the fund.

READ: About to retire, shocked at financial advice fees

It basically provides that the deduction allowed against any amount received by or accrued to a person (you) by way of a lump sum benefit derived in consequence of or following upon his or her retirement is an amount equal to so much of the person’s own contributions that did not rank for a deduction against the person’s income in terms of section 11(k) or (n) to retirement annuity fund (or other fund) of which he or she is or previously was a member.

If the "excess amount" exceeds the lump sum section 10c will apply.

It provides for an exemption in respect of the aggregate of compulsory annuities payable to a person an amount equal to so much of the person’s own contributions to any pension fund, provident fund and retirement annuity fund that did not rank for a deduction against the person’s income in terms of section 11(k) or (n) as has not previously been allowed to the person as a deduction in terms of the Second Schedule.

READ: Three key factors for retirement-readiness

The excess therefore in a sense reduces the annuity amounts (paid out of the two thirds interest).

Please note that the reference to section 11(n) will be removed when the new retirement rules become effective (expected 1 March 2016). Also remember that the minister proposed that an amount equal to the non-deductible contributions to retirement funds be included in the dutiable estate when a retirement fund member passes away. 

We have not seen the proposed legislation yet.

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*Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

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