Tax on retirement income with the higher age rebates applied.
Tax payable
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Net income
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Medical credit
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Tax-free threshold
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Why retirement does not mean tax-free
A surprise for many new retirees is that the pension or annuity income they draw is taxed almost exactly like the salary they used to earn. The money comes off the same progressive scale, runs through the same seven brackets, and is collected through PAYE by the fund that pays you. What changes in your favour is the set of rebates. From 65 you get a second rebate, and from 75 a third, and together they lift the income you can receive before any tax bites. This tool applies the higher age rebates and the medical scheme credit to your annuity income so you can see the real tax and the net you take home.
How the age rebates lift your tax-free line
Everyone gets a primary rebate. The figures this calculator uses, in line with SARS practice, put it at R17,235 for the year. At 65 a secondary rebate of R9,444 is added, and at 75 a tertiary rebate of R3,145 on top of that. Because a rebate is subtracted straight from the tax owed, more rebate means a higher income threshold before tax starts. As modelled here, a 65 to 74 year old pays no tax until income reaches about R148,217, and someone 75 or older until about R165,689, against roughly R95,750 for a younger person. Treat those thresholds as the tool's working assumption and confirm the current numbers with SARS, since rebates are reviewed each Budget.
Layered on top is the medical scheme fees tax credit. If you belong to a medical aid, you get a fixed monthly credit for yourself and each dependant, again subtracted from the tax owed. This calculator uses about R364 a month for the main member, so a single member is worth roughly R4,368 a year off the tax bill.
Tracing the tax on a R360,000 annuity
Take a 68 year old drawing R360,000 a year from a living annuity, with one person on the medical aid. Using the rates this calculator applies, the gross tax from the brackets is about R74,632. Subtract the combined primary and secondary rebate of R26,679 and the medical credit of R4,368, and the tax payable falls to roughly R43,585. That leaves a net income of about R316,415.
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The chart shows how the annuity income splits between net take-home and the tax that remains after rebates and credits.
A trap with two income sources
If you draw from more than one source, say a living annuity and a guaranteed annuity, each payer applies the brackets and rebates to its own slice as though it were your only income. Separately they each look modest, but added together they push you into a higher bracket, and you can land with a nasty assessment in July. SARS lets you ask your fund to deduct PAYE at a higher fixed rate so the full picture is covered through the year. If you have several income streams, that single request can save you a lump-sum shock later.
Is the capital in my living annuity taxed when I draw it?
No. Only the income you withdraw each year is taxed as income. The capital itself grows free of tax inside the annuity, and there is no capital gains tax or dividends tax on the underlying investments while they sit in the fund. The trade-off is that the income is fully taxable on the normal scale when it comes out, which is what this calculator measures.
Does drawing a smaller income cut my tax sharply?
It can, because the scale is progressive. Trimming your drawdown so your annual income stays under the next bracket threshold means the rand you keep in the fund is not taxed at the higher marginal rate, and it keeps compounding. Many retirees deliberately set their living annuity income just below a bracket edge for this reason, balanced against actually needing the money to live on.