The timing of your retirement is essential, as are the plans you make for your income levels at retirement under the current tax system.
John Kinsley told the Personal Finance/TMA Truth about Retirement seminars that there are five issues you must take into account when planning your retirement date. These are:
* Date:
Retire as early in the tax year as possible because under current taxation regulations your lump sum payments are taxed at your highest average rate of tax in the current or previous tax years. By retiring early in the current tax year you will reduce your taxable income substantially because you will be receiving a pension and not a salary plus perks. The result is you can then concentrate on reducing your non-pensionable income in the tax year before retirement;
* Regular income accrual:
Reduce your income to a minimum in the year before retirement. Do not earn unnecessary interest on investments or commissions;
* Lump sums:
Do not take share options or proceeds from a retirement annuity. Keep these until at least another year after retirement at which point your income level will be lower as will your tax rate. Again your highest average rate of the current and the previous year are used to tax any retirement annuity lump sum;
* Deductions:
Use tax deductions such as putting part of your lump sum towards purchasing a single premium retirement annuity. You are allowed to claim an amount equal to15 percent of your annual non-retirement taxable income if you invest the money in a retirement annuity. If you need significant medical treatment, such as dental surgery, have it done before you retire as, depending on what you earn, you can claim a portion back against tax. This only applies to amounts not payable by a medical aid scheme;
* Investment Strategy:
It is essential to plan your investments to provide the maximum tax-free income. This means you should not earn fully taxable interest income or income from matured retirement annuities, which do not allow flexibility in structuring income streams. Options include:
* Unit trust-linked annuities which allow you to set income streams;
* Investments in unit trusts where you can draw tax-free capital growth;
* Matured life assurance endowment policies which are kept in force but where you make partial surrenders of the annual capital growth giving you a tax-free income.