One of the big decisions you will make in life is your retirement date. However, do not regard retirement as a one-date decision. Retirement takes place over a number of years.
In terms of tax legislation, you can retire at any age from 55, but before the age of 70. This does not mean you need ever retire in the sense of permanently stopping work. Neither does it mean that for tax purposes retirement necessarily happens on one particular day or that you must stop investing for the future.
No official retirement date
The government does not set a retirement date, mainly because South Africa does not have a state-sponsored retirement scheme to which you can contribute. However, the rules of retirement funds and government policy play a major role in deciding when you retire.
The government
The government provides an indication of when it would like you to retire by offering tax incentives, mainly through the Income Tax Act, and setting an age at which you become eligible to receive a social old age pension.
The government, with the South African Revenue Service (SARS) acting as its agent, sends out a confusing message about the age at which it considers you to be a pensioner:
- Men qualify for a social old age pension at age 65 and women at age 60. This is the only remaining discrimination made on gender grounds in legislation relating to retirement.
- You are entitled to claim your full tax benefits on your retirement benefits from age 55. People who work in certain special categories of professions, such as airline pilots and miners, can retire earlier.
- You must retire from any tax-incentivised retirement fund, including a retirement annuity (RA), by the age of 70.
- You can claim the secondary rebate against your taxable income from the age of 65.
- From age 65 the amount of tax-free interest you can earn on savings increases from R11 000 to R16 000 a year (2004/05 tax year).
- You can claim all medical costs against your taxable income from the age of 65.
In effect, the government, in terms of tax legislation, sets the retirement age at 70, but gives you some encouragement to retire before you reach 70. This does not mean you cannot continue working after 70. It does mean that you can no longer contribute to a tax-incentivised retirement savings scheme after you turn 70.
Retirement fund rules
If you are a member of an employer-sponsored retirement fund, your retirement date is set by the rules of the fund.
The common practice among most sponsored retirement funds is that almost everyone must retire between the ages of 60 and 65. In the case of RAs, you are required to retire before the age of 70 (to comply with the Income Tax Act).
However, most sponsored funds also allow for early retirement after the age of 55; and earlier retirement if you are in ill-health. Normally, however, you incur penalties if you take early retirement. These penalties could result in you receiving a lower pension than you would have received if you had stuck it out until your "official" retirement age.
From a financial perspective, you have to consider retirement in terms of the following:
- Your loss of earnings;
- Your accumulated retirement savings; and
- Taxation.
Your retirement date can be affected by a number of issues, including:
- Whether or not you want to stop working;
- Your health;
- Disability;
- Wealth, or the lack thereof;
- Taxation;
- Retirement fund rules; and/or
- Early retirement, such as re-trenchment (voluntary or forced).
Whether your retirement is voluntary or involuntary, there are numerous issues you must take into account when you retire. Some of the issues are specific to the reason you are retiring, while others apply generally to everyone.
Best time to retire
The questions people often ask about timing their retirement include:
- Do I retire on the date set by my retirement fund?
- Do I retire early or late?
- When is the best time of the year to retire?
In timing your retirement, you need to take a number of issues into account, while having fixed objectives. For example, are you retiring early because you want to change careers, you are in poor health, you want to sit on the beach and do nothing, or because you are afraid that changes to the tax laws could adversely effect you at retirement?
Tax implications
You should keep your income as low as possible in the two years before you retire, when you can expect to receive most of your retirement savings. This is because any lump-sum payouts you receive are taxed at your preferential average rate of tax and not at your higher, marginal rate of tax.
March remains the best month in which to retire. This is because SARS uses the highest average rate of tax you paid during your last two working years as the base to set the average rate at which it will tax your lump-sum benefits. By retiring early in the new tax year, you reduce your total income for that year, and you then only have to work on reducing your income and tax rate in the year before you retire.
However, make sure you retire in March and not on February 28 or 29 - the last day of the old tax year.
In recent years, the issue of timing retirement has been dominated by proposed changes to the tax system. However, the government has indicated that it will protect the vested rights of individuals.
You need to base your decisions on the existing tax system, because you cannot be sure what will happen in the future. You should be careful not to let tax considerations blind you to other issues.
If you have an RA, you can also "partially" retire at 55 to get tax benefits. The purpose is to take advantage of the tax concessions you can receive on up to one-third of the lump-sum payout from a retirement fund, including an RA. You can "retire" an RA early, at age 55, to take advantage of the tax concession, and continue working. You may then retire from your job at 60 or 65 to receive your main retirement income from a sponsored retirement fund.
Next week:
Other factors to consider in deciding when to retire