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How to pay zero tax in retirement

Without resorting to any ‘clever’ structuring.

When an acquaintance recently turned 64, he said he “couldn’t wait” for his next birthday.

The people around the table at his birthday party were taken aback. Most people don’t look forward to getting older. Why was he so excited?

“Because from next year, I will pay less tax!” he quipped.

He was right, of course. At age 65, individuals get an additional tax rebate. A higher annual interest exemption also becomes available.

The comment sparked a question. What type of income would a couple be able to draw in retirement before they would have to start paying tax? Naturally, there are various ways of reducing one’s tax liability, particularly if you use clever structures, avoidance techniques and the like, but what if you kept it simple? In other words, no contributions to retirement annuities or investments in Section 12J venture capital companies – just using the main tax thresholds, rebates and exemptions allowed?

The example below is intended as an illustration and covers the tax year that will end on February 28, 2019. The assumption is that the taxpayer and her spouse are 65 or older, but not yet 75, that they have retired and don’t have any additional income beside their annuities and discretionary investments. 

Income, interest and tax-free savings

At age 65, the income tax threshold is R121 000 per annum. In other words, an individual would be able to draw an annual income of R121 000 from an annuity without paying any income tax.

The interest exemption is R34 500, and the same individual would be able to draw R34 500 from an interest-bearing investment before the Tax Man would come knocking.

Tax-free savings accounts were introduced on March 1 2015. Assuming the taxpayer contributed the maximum amounts allowed to these accounts every year, the capital value would be R126 000 ((R30 000 pa x 2) + (R33 000 pa x 2)), says Martin de Kock, director at Ascor Independent Wealth Managers.

To keep the calculation fairly simple and conservative, the assumption is that there has been no growth on these accounts and that the return on the investments for 2019 was 7%, giving the investor a tax-free income of R8 820, he adds.

Summary of annual tax-free income calculation

Income from annuity

R121 000

Interest income

R34 500

Return on tax-free investment @ 7%

R8 820


R164 320

This means that the couple could get a tax-free income of around R328 640 per year (R164 320 x 2), which amounts to R27 387 of income each month.

Assuming they don’t have any debt or rental expenses, no dependents and limited medical overheads, this would be a reasonable amount of money to live on.

Capital gains

Where retirees have share portfolios or other equity-type investments like unit trust funds outside a retirement annuity vehicle, this could also be used to supplement the monthly income of R27 387. These investments are also referred to as discretionary investments or funds.

However, this calculation is somewhat more complex since the tax-free “income” that could be derived by selling shares, would be highly dependent on the capital growth in the portfolio.

Currently, the annual amount above which capital gains become taxable is R40 000. In other words, if the capital gain on shares sold is R40 000 or less, no tax will be payable on the proceeds. Where a share portfolio had good capital growth over a longer period of time, an individual may be able to sell say R100 000 worth of shares before the R40 000 threshold would be triggered. However, if the share portfolio did not perform well and your growth is limited, you may need to sell much more shares or units to generate the tax-free capital gain of R40 000. From a cash-flow perspective, this makes it difficult to use these amounts for planning purposes in an example like this, De Kock says.

Compulsory and discretionary funds

Since pensioners may not be in a position to generate additional income in retirement, and taxes can make a big difference to their situation, it is important to get appropriate, independent advice prior to retirement.

De Kock says from a tax perspective, if could be sensible to create an additional pot of discretionary funds alongside the funds saved in a retirement vehicle like a pension fund, provident fund or retirement annuity leading up to retirement. Individuals would then be in a position to draw an income from their discretionary funds (for example money in a cheque account), which could be utilised without tax implications (this is after-tax money). This could allow retirees to keep their overall tax rate as low as possible (even zero) during the first few years of retirement, while still allowing funds in the retirement vehicle to grow (assuming it is a living annuity). As the discretionary funds deplete over time, more income could then be drawn from the annuity and at age 75, another tax rebate will become available (albeit a fairly small one).

Ultimately, tax is only one of the various factors retirees need to take into account when structuring their financial affairs. It is no use putting money in a bank account to save a few rand in taxes, if it means the investor will need to forgo significant capital growth. Decisions around tax structuring must make sense within a broader financial plan.

“Doing retirement planning and focusing too much on tax could lead to bad results – beware!”

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Can you please do a similar scenario calc if you are 61?


Sensible, informative, valuable and applicable article. Well done Inge.

Three points stand out, and are equally true no matter which life stage you’re in:
– There is no substitute for sensible and timeous financial planning, which is NOT the same thing as having a financial product sold to you;
– Paying tax is sometimes the opportunity cost for sound planning and getting what you want;
– If you are living in South Africa and have to pay some tax, you are quite lucky – having to pay tax means you have some income above the breadline, which is more than what a lot of people can say.

I know the answer to this one!
Don’t save anything and pay -R20,280 (-R1,690 x 12) tax (by receiving an old age grant).
Man, I love socialism!

You are hardly in the pound seats with R1.7K PM.
And if the system worked like it should then you are just getting some of your tax money back after paying it for so long in taxes.

This couple are fortunate that they pay no income tax but they’re going to battle to live on R17000 per month what with vat,petrol tax,rates and taxes and Eskom still to be paid.The R10387 per month should buy them a decent medical aid and pay for all the things medical aids don’t pay for these days if they’re lucky!

Actually it is R 328 640 p.a. or R 37 386.67 p.m. and a decent medical aid is about R7K p.m. I know many couples who live on less than R20K p.m and they manage.

The trick is to split the income between the husband and wife. Then take into account tax free savings which everyone should have plus the CGT exemption and you could end up with +R43K p.m. before paying any tax at all … just takes some planning.

How does R328640 come to R37386.67 p.m.? Drop that by ten grand.A decent medical aid will cost a couple at least R7k p.m. but it certainly won’t cover everything.What about out of hospital costs,doctors charging 300% of the tariff which is pretty standard and the gap between your savings and your threshold.

The article makes many assumptions and tends to pigeonhole the 2 taxable parties. This type of planning would by necessity be required to be undertaken almost at start up of employment which planners would be incapable of advising on. Simplistically you only have to look at one of the vehicles RA’s – 30 years ago versus todays RA’s they are chalk and cheese and the fee structures have changed significantly. 30 year old RA’s certainly never realized their peddlers promises and quite candidly you could find yourselves destitute on the capital available to invest in a L’A;

Why don’t we learn from the history.
The investments we made in the early 80’s via the various products offered at the time will not yield what was promised.
Why will the new products be different?
The system does not work

Why don’t the insurance companies publish the facts.
Give us a excel sheet with products bought in early 80’s and show what the clients paid pm, what they received as lump sum. Or stand to receive as lump sum in the next 2 or 3 years.
Show us what they receive monthly after the lump sum. Show the taxes paid on the lump sum.
How many clients bought, how many bailed out.
Show us the last 38 years. We can do the sums.
Then we have the facts.
Maybe then nobody will buy their products ever again?

Because they are different (unit trust RAs vs life insurance RAs), no penalties for causal events, fees are much lower, much more flexible. If you do take your RA with a life insurer now, expect much of the same as in the past.

Nice article. More free stuff around than many might imagine.

I find it very difficult to understand the sense of being bound in a tax-tree savings account, for several years, at the age of 65 or older. These TFSAs are great for pre-retirement age but unless you have a post-retirement income you are more likely to need a monthly pension payment.

The rest of the article makes some fairly good sense.

Surely there’s no harm in contributing to a tax free account when retired.In the example above the couple would start paying tax above R311000 instead of R328640,if they didn’t have a tax free account.

Hi, please explain the tax free saving calc. According to my knowledge you may only invest R30000 pa! So how do you calc for twice the amount please?

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