Saving for retirement? Try these tax-smart retirement planning tips

Saving for retirement has become quite complicated, especially when making sure that you have enough money to retire on, but there are tax-smart steps you can take to ensure that your savings go a little further.

In the past decade, retirement planning has undergone a significant transformation. It is no longer simply about fading into the background in your later years. Instead, retirement has taken on a fashionable makeover, with a focus on vibrant and fulfilling lifestyles.

“The allure of exclusive lifestyle estates, where people over the age of 55 eagerly vie for entry, is a testament to this evolving trend. Today, achieving a stress-free retirement is a serious endeavour, one that demands meticulous forethought and financial prudence,” Morné Janse van Rensburg, MD at Hobbs Sinclair, says.

“In this complex landscape, the importance of starting retirement planning well before the age of 50 cannot be overstated. Moreover, proactive financial planning can go beyond the basics, offering opportunities to maximise income and minimise tax burdens during retirement.”

Van Rensburg emphasises the importance of understanding the tax advantages available for people over 65. “Given the potential length of retirement and the pursuit of blue zone living, understanding the impact of taxes on your financial well-being is as crucial as it was during your saving years. The good news is that, upon retirement, there may be opportunities to enhance your after-tax income.”

He says you must keep these opportunities in mind:

Interest exemption

If you are younger than 65, a local interest exemption of R23 800 per tax year applies. “Suppose, for example, you earned R50 000 in local interest during the 2024 tax year. In this case, the first R23 800 remains exempt, with only the remaining R26 200 subject to income tax.”

Once you turn 65, the exemption increases to R34 500. Van Rensburg says this means that people over 65 can receive interest of up to R2 875 per month tax-free (excluding personal tax rebates). “When withdrawing your lump sum from your pension or retirement annuity fund, consider investing a portion in an interest-bearing account to maximise your tax-free income post-retirement.”

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Adjusted tax thresholds

In the 2024 tax year, the tax threshold for people younger than 65 is R95 750. “This signifies that if your taxable income remains at R95 750 or lower, you will not incur any income tax. However, for people over 65, the threshold rises to R148 217. “Consequently, an individual in this age group can receive an income of up to R12 351 per month without incurring income tax.”

In addition, when you turn 75, the threshold expands further to R165 689, equating to R13 807 per month.

Additional medical tax credits

People over 65 are entitled to an additional medical expenses tax credit, based on medical expenses not covered by their medical aid. This includes doctor’s fees, medication costs, optometrist fees, physiotherapist fees, nursing assistant fees and hospital charges.

Monthly withdrawals from investment portfolios

Withdrawals from unit trust investment portfolios are an excellent source of retirement income and Van Rensburg says the good news is that Sars does not view these withdrawals as taxable income. While you may be liable for income tax on capital gains, dividends, or interest from the portfolio, the tax rates are typically lower than those for ordinary income.

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Tax-free investments

Tax-free savings accounts, introduced by Sars in 2015, offer another avenue for tax-free income in retirement. Currently, you can invest a maximum of R36 000 per tax year and a lifetime total of R500 000. Interest earned within these accounts is exempt from income tax.

Donations to a spouse

Donations between spouses remain exempt from donations tax under section 56(1)(b) of the Income Tax Act and is a valuable consideration for estate planning. Therefore, you can donate an unlimited amount of your assets to your spouse without having to pay any donations tax.

Donations

Each individual also has an annual R100 000 donations tax exemption where you can donate up to R100 000 in cash or assets to anyone else (individuals, companies, trusts, etc.) free of donations tax. However, Van Rensburg says, you can divide and use your annual exemption as you want as long as your total donations to all recipients do not exceed R100 000 per year. Any donations above the exemption limit will be subject to donations tax of 20%.

“This is a popular method of passing inheritances earlier to your heirs while you are still alive, commonly known in practice as ‘gifting assets with warm hands’.”

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Estate duty reduction

Various deductions can be used to reduce estate duty, such as bequests made to Public Benefit Organisations (PBOs) or PBO-registered charities, which can diminish the taxable value of an estate.

Timing matters

The timing of withdrawals from different investments during retirement can have significant tax implications, Van Rensburg says. “It is vital to take a thoughtful approach to tax management and seek advice from a tax or financial advisor to chart a course of action aligned with your financial goals.”