LFPP5800 - Unit 2 - Retirement Planning 2020

LFPP5800 – Personal Financial Planning
UNIT 2
RETIREMENT PLANNING
Unit Overview:
This unit sets out investment planning as a component of financial planning.
Assessment of Unit:
Formative Assessment: LFPP5800 Quiz 2 and 5
Summative Assessment: LFPP5800 Exam. 20 - 30% of the exam paper is made up of investment
planning. You will also be tested on investment in LFPS5800.
Please see the date page and the study schedule for the dates regarding the assessments.
Relevant information to be studied with this Unit:

South African Financial Planning Handbook (SAFPH): Chapters 25, 36 – 38
Income Tax Act and the Pension Funds Act
Broadcast can be used for some finer points
The DVDs
Other relevant documents can be found in the additional information folder.
Students are also encouraged to make use of the SARS website for practice and explanatory notes are
very useful.
Suggested Study Method:

1. Read the learning outcomes
2. Read the relevant chapters in the SAFPH to get the foundation knowledge
3. Watch the DVD
4. Study the study guide and related documents
5. Listen to the broadcasts
Exam preparation:
1. Pay special attention to the exam guidelines
2. Making use of old exam papers / quizzes to practice calculations is recommended
3. Work through an old exam papers and quizzes to familiarise yourself with how the questions
are asked.
UNIT 2
Retirement Planning
Chapter 36 – 38, South African Financial Planning Handbook, 2020
Learning outcome for this Unit

By the end of this unit, the learner must be able to:
1. Understand the life cycles important for retirement planning.
2. Understand the impact of the matrimonial property regimes on retirement planning.
3. Determine the client’s retirement objectives and goals.
4. Analyse the client’s retirement position.
5. Calculate the capital available at retirement.
6. Calculate the income needed for retirement.
7. Understand the workings of different retirement funds.
8. Explain the different types of benefits that can be expected from a retirement fund.
9. Calculate the maximum tax deductions available to a client in respect of contributions
towards retirement funds.
10. Understand living annuities and implement them as part of retirement planning.
11. Understand and calculate the income tax implications of contributions towards various
retirement funds.
12. Understand and identify the nature of funds received from a retirement fund upon
retirement, dismissal, retrenchment, change in employment and death as a withdrawal
benefit or retirement benefit.
13. Calculate and give advice regarding taxation of lump sums received from retirement
funds and the deductions allowed in respect of the lump sums.
14. Explain the effect of divorce on retirement as well as the taxation thereof.
15. Formulate and draft a retirement plan for a client that meets the objectives of
retirement planning and the needs and goals of the client.
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LFPP5800: UNIT 2 – RETIREMENT PLANNING
1. Understand the life cycles important for retirement planning.

Life cycles play an important role in retirement planning. Although various cycles can be
identified, there are three main cycles, of which some can be sub-divided further. These are:
(i) The pre-retirement period. This is the period during which the person is still investing
funds to ensure that he or she will have the required retirement capital. This period
starts when a person starts his working life and continues through his mid-career and
ends when he gets close to retirement.
(ii) The next cycle is when the person is close to retirement and decisions are to be made
as to the format in which the retirement benefits are to be taken and invested.
(iii) The final cycle starts at the date of retirement and includes the actual period of
retirement thereafter.
The person must continue to plan his retirement irrespective of which cycle he or she may be
in. In the outcomes that follow, the planning that is to be done in each of the mentioned life
cycles is discussed further.
2. Understand the impact of the matrimonial property regimes on

retirement planning.
Civil marriages
A civil marriage is a marriage that is entered into in terms of the Marriage Act 25 of 1901.
A married couple can be married in community of property, out of community of property
with the accrual excluded, or out of community of property with the accrual included. Married
couples normally plan their retirement together, normally in such a way that they both retire
at the retirement date of the main breadwinner. On the death of the first dying spouse after
retirement, the retirement assets, excluding retirement funds, may form part of the joint
estate if the spouses are married in community of property or they could be owned entirely
by one of the spouses. It is therefore important to plan retirement in such a way that the
retirement capital that is required by the surviving spouse is not bequeathed in such a way
that it accrues to some other person, causing a shortfall in retirement capital for the surviving
spouse. Compulsory annuities can be purchased in such a way that they continue to pay until
the death of the survivor.
In the case where the deceased person and his spouse were married out of community of
property or in community of property, the respective pension interest of the spouses does
not form part of their estates, but will be subject to the provisions of section 37C of the
Pension Funds Act.
It should also be borne in mind that a person’s pension interest in a retirement fund only
forms part of his estate for the purpose of section 7(7) of the Divorce Act in the event of
divorce.
Each spouse qualifies separately for the maximum tax deductions in respect of contributions
that are made to retirement funds in the year of assessment. In the same way, the spouses
qualify separately for any exemptions in respect of investment income (where applicable).
After retirement, each spouse will be taxed separately on annuities that are received from
retirement funds that the particular spouse has retired from.
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Customary marriage
A customary marriage is in accordance with traditional customs and culture of South Africa’s
indigenous people. Customary marriages are legally recognised in terms of the Recognition of
Customary Marriages Act (“RCMA”), which came into effect on 15 November 2000.
The Act recognises customary marriages that had been concluded before its commencement.
There are requirements for the validity of customary marriages after the commencement of
the RCMA. Even though registration is not a requirement for a valid customary marriage the
RCMA creates a duty for the spouses to ensure that their marriage is registered.
According to the Act a man in a customary marriage may enter into another customary
marriage with another woman. He may also enter into a civil marriage with that same
customary marriage spouse. It is, however, not possible to enter into a civil marriage with
another woman. Furthermore, a man who entered into a civil marriage first, can not enter
into a customary marriage thereafter.
A customary marriage without an antenuptial contract, and where neither of the parties is
party to another customary marriage, is a marriage in community of property
Civil unions
The Civil Union Act (“CUA”), effective from 30 November 2006, provides for the recognition
of civil unions between certain classes of persons, such as same-sex partners. The CUA places
civil unions in the same legally recognised category as civil marriages in terms of the Marriage
Act and provides that any reference to marriage in any other law, including the common
law, is also a reference to a civil union.
Muslim marriage
Muslim marriages are not yet legally recognised. The Muslim Marriages Bill still awaits
proclamation. The constitutional court has made an effort in terms of the bill of rights, to
extend the rights of Muslim spouses so that they have the same or similar rights to parties in
a civil or customary union. Even though the Muslim Marriages Bill has not yet
Common-law marriage
There is no such thing as common-law marriage in South Africa. However, the South African
courts have ruled that there may be an express or implied universal proper partnership in
existence between a cohabiting couple. This may resemble a marriage in community of
property.
The requirements are:

• The aim of the partnership must be to make a profit.
• Both parties must contribute to the enterprise.
• The partnership must operate for the benefit of both parties and the contract between
the parties must be legitimate.
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It is highly recommended that a couple that is living together, should obtain legal advice and
enter into a cohabitation agreement.
3. Determine the client’s retirement objectives and goals.

A client’s objectives and goals are usually to retire at a particular age with enough capital to
provide the retirement income required and, in some cases, also to meet other financial
obligations at retirement date or thereafter. To determine these objectives and goals the
following information is needed:
(i) The client’s current age and his retirement date.
(ii) The client’s risk profile, risk capacity and risk required. (It is important to be able to
distinguish between these three concepts.)
(iii) His current retirement provisions.
(iv) His income required after retirement and the length of time for which it will be needed.
(v) Additional capital required at or after retirement date.
– Travel after retirement (i.e. children living offshore)
– Dependents after retirement (i.e. children still studying)
– Replacement of vehicles.
– Provisions for medical care.
– How the client will occupy him-/herself after retirement.
(v) Additional capital required at or after retirement date.
(vi) The rate of inflation and the annual rate of return that the client can expect to earn on
his investment.
4. Analyse the client’s retirement position.
5. Calculate the capital available at retirement.
6. Calculate the income needed for retirement.

The above three outcomes are interlinked and they are therefore discussed collectively. One
comprehensive question that covers all three is given below.
Analysing a client’s retirement position is nothing more than a comparison. On the one hand
one must calculate the amount of capital that a client will need at his retirement date to
provide him with the required income after retirement, and on the other hand one must
calculate the value of the retirement capital that the client will have at his retirement date.
The difference will reflect either a surplus or a shortfall. If there is a shortfall,
recommendations must be made regarding the shortfall. This process can be graphically
depicted as follows:
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Discretionary Retirement Investment

Assets Assets Portfolio
Lifestyle
portfolio
Remember:
The lifestyle portfolio is not taken into account when calculating the retirement position.
Some people include their primary residence in their retirement planning, but do not take
into account that moving into a retirement village can be very costly and a surplus after selling
the primary residence is not guaranteed.
Retirement planning is not merely the calculation of the maximum tax-deductible amount a
person can contribute to one of the available retirement funds. Before any recommendations
can be made in respect of contributions, it is first necessary to calculate whether the person
will have sufficient capital at his retirement date. A “financial needs analysis” will help to
identify how much capital a person will need to retire on as well as to achieve other financial
goals. It will also help to identify what his/her dependants will need including life assurance
in the event of the client’s death/disability.
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6.1 Tasks
6.1.1 Mr Bennet is 40 years old and plans to retire in 20 years’ time. His current retirement
provisions are as follows:
• He is a member of a defined contribution retirement fund. The current fund value
is R450 000.
• He contributes 7.5% and his employer contributes 10% of his retirement funding
salary to the fund. The risk premium portion of the contribution amounts to 2.5%
of the employer contribution.
• His retirement funding salary is R200 000 per annum and he expects it to grow at
a rate of 6% per annum.
• He also contributes a fixed R1 750 per annum to a retirement annuity fund (RA).
The estimated fund value of the RA is R95 000 at his age 55. He intends to continue
contributing until age 60.
His wishes:
He wants an after-tax retirement income of R120 000 per year in today’s (real)
money terms till the age of 90. The income should increase at 6% per year. Provision
should be made for the purchase of a new car and an overseas holiday at his
retirement. The current price of the vehicle and cost of holiday that he has in mind
is R600 000 in total.
Assume the following:
All instalments (including the income after retirement) are payable in advance.
The net return on capital for all periods will be 12% per annum.
The inflation rate will be 6% per annum throughout.
The expected effective tax rate applicable to his retirement income will be 20%.
95% of the RA contribution is invested.
6.1.1.1 Calculate the capital shortfall at retirement.

It is recommended that you summarise the facts before doing a calculation:
Summary of information for calculation:
Client: Mr Bennet
Age: 40
Retirement age: 60
Income after retirement required till age: 90
Preferred income after retirement (after tax): R120 000
Annual escalation on income required: 6%
Lump sum required at retirement (cost of car and holiday): R600 000
Current retirement funding salary: R200 000
Expected annual salary increase: 6%
Total employer contributions: 10.0%
Contribution for risk benefit: 2.5%
Employer contribution: 7.5%
Total contribution to fund: 15.0%
Net return on investment portfolio: 12%
Contribution to RA: R1 750
Percentage of contribution invested: 95%
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Age when RA matures: 55

Inflation rate: 6%
Income required before tax: R120 000 ÷ 0.8 = R150 000 per annum (20% effective
rate)
Calculate future value of pre-tax income required
1P/Yr
150 000 PV
20 N (term to retirement)
6 I/Yr (rate by which his income is required to increase every year)
FV R481 070
Therefore, annual pre-tax income needed in the first year of his retirement is
R481 070
Calculation of capital required at retirement date to provide the post-retirement
income.
The first step here is to determine the “resultant rate”.
Formula for calculation of resultant rate:
1 + 𝑖𝑖
[{ } – 1] × 100
1 + 𝑒𝑒
Return on capital after retirement = 12%
Rate at which income must escalate = 6%
1.12
[ – 1] × 100 = 5.66038%
1.06
An alternative method that can be used to determine the resultant rate is as follows:
12 minus 6 = 6
Then 6 ÷ 1.06 = 5.66038% (Note: The 1.06 is 1 plus the escalation rate in other words
1 plus 6% of 1).
Calculate the capital required to provide income after retirement:
On HP 10bII
1 P/Yr and begin mode
481 070 PMT
30 N (Term of provision after retirement)
5.66038 I/Yr (Resultant rate as calculated)
Capital needed to provide preferred income during
PV 7 258 460 retirement
Calculate the future value of any lump sum required at retirement (purchase price
of new car and holiday at retirement date):
On HP 10bII
1 P/Yr
600 000 PV
6 I/Yr (inflation rate)
FV R1 924 281
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Calculate the total capital required at retirement:

Capital needed to provide income 7 258 460
Lump sum (cost of new car and holiday) 1 924 281
9 182 741
6.1.1.2 Calculate if there is sufficient capital available.

Retirement fund
At his retirement date, the value of his interest in the retirement fund will consist of
the future value of the amount currently in the fund plus the future value of all the
contributions that are still to be made up to retirement date.
Calculate the future value of current defined contribution retirement fund value
On HP 10bII
1 P/Yr
450 000 PV
12 I/Yr (return on capital)
FV R4 340 832
Calculation of value of future contributions
Not all of the contributions made will go into the investment fund. In respect of the
employer contributions only 7.5 percentage points (10 minus 2.5) will be invested.
The amount to be invested in the fund in the current year is R30 000 (15% (7.5% +
7.5%) of R200 000). As his salary will increase by 6% p.a., the retirement fund
contributions will also increase by 6% per annum.
Calculate value of future contributions to fund at retirement:
Illustrative pre-tax return on capital after retirement 12% (i)
Annual increase in income required post retirement 6% (e)
Resultant rate: 5.66038%
On HP 10bII
1 P/Yr
30 000 PMT
5.66038% I/Yr
PV R373 815 (will show in display)
0 PMT
12% I/Yr
FV R3 605 928
Total future value of the defined contribution retirement fund at retirement date.
Total value of pension fund at retirement:
FV of current assets in fund R4 340 832
FV of contributions to be made R3 605 928
R7 946 760
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Calculate value of retirement annuity fund at retirement:

1P/YR
Begin mode
95 000 +/- PV
1662.50 +/- PMT % of the RA contribution that is invested
5 N
12% I/YR
FV R179 251.46
Value at
Asset
retirement
Pension Fund R7 946 760
Retirement Annuity Fund R179 251
R8 126 012
Calculate surplus or shortfall at retirement:
Capital available R8 126 012
Less: Capital required -R9 182 741
Shortfall -R1 056 729
The capital shortfall at retirement is R1 056 729.
6.1.1.3 Calculate the capital amount that should be invested now to finance the
shortfall.
1 P/YR
R1 056 729 FV
20 N (Years to retirement)
12% I/YR (Growth rate of investment)
PV 109 548
The capital sum that must be invested now to finance the shortfall is R109 548.
6.1.1.4 The level annual investment required to finance the shortfall (accept that 100%
of the recurring amount will be invested).
Begin mode
1P/YR
R1 056 729 FV
12% I/YR (growth rate)
PMT R13 095
The level annual investment required to finance the shortfall is R13 095.
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6.1.1.5 The increasing annual investment required to finance the shortfall (accept that
100% of the recurring amount will be invested and that it will increase at the
same rate as Mr Bennet’s salary).
Resultant rate: Interest rate: 12% Escalation rate: 6% 5.66038%
Present value of shortfall:
Begin mode
1P/YR
R1 056 729 FV
12% I/YR (growth rate)
PV R109 548
Begin mode
1P/YR
R109 548 PV
5.66038% I/YR (resultant rate)
PMT R8 792
The first escalating annual investment required to finance the shortfall is: R8 792
This amount will increase annually by: 6%
7. Understand the functioning of different retirement funds.

This outcome is reasonably technical. You must study the terms “pension fund”, “provident
fund”, “retirement annuity fund”, “pension preservation fund” and “provident preservation
fund” as they are defined in the Income Tax Act. Also study the relevant chapter in your
handbook where this is discussed. Only the main characteristics of the different funds are
briefly discussed here.
7.1 Pension - and Provident funds
A person can only be a member of a pension fund if he is an employee of an employer
for whose employees the fund has been formed, or an employer that participates in
the fund.
Contributions by the employer are tax deductible under section 11(l) of the Income
Tax Act. The section does not restrict the amount of the deduction other than that
the CSARS must be satisfied that the aggregate of the contributions is not excessive
or unjustifiable in relation to the value of the services rendered by the employee to
the employer. If it is, the deduction will be limited to what is not excessive. Take note
that the maximum deduction is no longer limited to of 10% of the employee’s
approved remuneration.
A partner of a partnership can also be a member of a pension fund. A partner of the
partnership is deemed to be an employee of the partnership.
On retirement from a pension fund (including a retirement annuity fund and a

pension preservation fund), the member may not commute more than one-third of
his retirement interest in the fund for a lump sum. If the entire fund value does not
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exceed R247 500, the full amount may be taken in cash. This rule differentiates
between a pension fund and a provident fund. In the case of a provident fund, the
full retirement interest can be taken as a lump sum on retirement of the member.
Take note that this may change in future when the preservation requirements are
amended.
Previously a member’s retirement benefit accrued on the retirement date stipulated

in the fund rules. A member could not preserve this benefit or postpone the date
from which he wanted to receive an income from it.
After changes to the Income Tax Act in 2015 and 2019 respectively a member may
now (if the fund’s rules allow for it) choose from when to receive the retirement
benefit.
The Income Tax Act allows transfers from a pension or provident fund to a retirement
annuity fund, pension preservation or provident preservation fund on or after
reaching normal retirement age, as defined in the rules of the fund, but before
retirement date.
It is important to note that the single allowable withdrawal applicable to

preservation funds will not apply to this transfer to a pension preservation or
provident preservation fund.
IMPORTANT:
RETIREMENT DATE means the date on which— (a) a member of a pension fund,
pension preservation fund, provident fund, provident preservation fund or
retirement annuity fund, elects to retire and in terms of the rules of that fund,
becomes entitled to an annuity or a lump sum benefit contemplated in paragraph
2 (1) (a) (i) of the Second Schedule on or subsequent to attaining normal retirement
age”.
NORMAL RETIREMENT AGE as defined in the Income Tax Act is not the normal
retirement date, but the earliest date on which a member becomes entitled to a
retirement benefit.
The rules of all the funds (pension fund, provident fund and retirement annuity fund)
may provide that on the death of the member, the full amount can be commuted for
a cash lump sum by the beneficiaries.
In previous budget reviews, it was proposed that to protect workers’ savings,
government proposes to subject lump-sum withdrawals from provident funds to the
one-third limit applying to pension funds and retirement annuity funds. The
implementation date of any changes in the rules governing provident funds will be
subject to thorough consultation with trade unions and other interested parties, and
vested rights will be protected.
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Existing members of retirement funds are encouraged to preserve their retirement

funds when changing jobs– The Revenue Laws Amendment Bill 2016 introduced to
Parliament in February 2016 gave effect to the decision by Cabinet to postpone the
annuitisation requirement for provident fund members for two years to allow for
further consultation with key stakeholders. The Amendment Act now postpones the
implementation of the annuitisation requirements for provident funds to 1 March
2021.
Retirement funds will assist members through the process of converting savings into
a regular income after retirement – effective date March 2019.
7.2 Retirement annuity funds

The term “retirement annuity fund” (hereafter referred to as a RA) is also defined in
section 1 of the Income Tax Act. This definition must be studied. An important
difference between a pension fund and a retirement annuity fund is the fact that the
member may not take a cash withdrawal from an RA before the age of 55 years,
whereas in the case of a pension fund and a provident fund, it can be done at
resignation. For an RA, there are exceptions in the case of emigration, when leaving
South Africa at expiration of work or visitor visa, disability and where the value of the
fund is below an amount that is from time to time prescribed by the Minister in the
Gazette. All retirement funds (including a retirement annuity fund) are taxed at 0%
in the fund. The full RA fund value may be taken as a lump sum in the event of the
death of the member – this is also possible with pension – and provident funds.
7.3 Pension preservation funds and Provident preservation funds

Before 2008, preservation funds were regulated by a SARS practice note (RF1 of
1998). In 2008, definitions of the terms “pension preservation fund” and “provident
preservation fund” were inserted in section 1 of the Income Tax Act. Study these
definitions. SARS repealed RF 1 of 1998 with effect from 30 September 2010 (See RF
1 of 2011).
When studying these definitions, pay particular attention to the following, taking
new legislation into account:
(i) In what instances may retirement fund benefits be transferred into a particular
type of preservation fund? In respect of a pension preservation fund, this is
contained in paragraph (a) of the definition.
(ii) What type of retirement fund benefits are allowed to be transferred to a
preservation fund? In respect of a pension preservation fund, this is contained in
paragraph (b) of the definition.
(iii) The number of withdrawals and type of withdrawals that are allowed to be taken
whilst the person is a member of the preservation fund.
Take note: Postponement of annuitisation requirements
The Revenue Laws Amendment Bill 2016 introduced to Parliament in February 2016
gave effect to the decision by Cabinet to postpone the annuitisation requirement for
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provident fund members for two years to allow for further consultation with key
stakeholders. The Amendment Act now postpones the implementation of the
annuitisation requirements for provident funds to 1 March 2021.
The tax harmonisation of contributions to retirement funds had been implemented

7.4 Summary of tax-free transfers between funds:
FROM TO
Pension fund
PENSION FUND Pension Preservation Fund
Retirement annuity
Pension fund
PENSION PRESERVATION FUND Pension Preservation Fund
Retirement annuity
Pension fund
Pension Preservation Fund
PROVIDENT FUND Retirement annuity
Provident Fund
Provident Preservation Fund
Pension fund
Pension Preservation Fund
PROVIDENT PRESERVATION FUND Retirement annuity
Provident Fund
Provident Preservation Fund
Retirement annuity Retirement annuity
8. Explain the different types of benefits that can be expected from a

retirement fund.
The benefits that a member can expect from a retirement fund are prescribed in the definition
of that fund in section 1 of the Income Tax Act. The definitions of “pension fund”, “provident
fund” and “retirement annuity fund” contain provisions that the CSARS shall not approve a
fund unless the CSARS, in respect of the year of assessment, is satisfied:
• That in the case of a Pension fund: … the fund is a permanent fund bona fide established
for the purpose of providing annuities or withdrawals from retirement income
drawdown accounts for employees on retirement from employment or for the dependants
or nominees of deceased employees, or mainly for the said purpose and also for the
purpose of providing benefits other than annuities for the persons aforesaid.
• That in the case of a Provident fund: …. the fund is a permanent fund bona fide established
solely for the purpose of providing benefits for employees on retirement from employment
or solely for the purpose of providing benefits for the dependants or nominees of deceased
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employees or deceased former employees or solely for a combination of such purposes or

mainly for the said purpose.
• That in the case of a Retirement annuity fund: ... the fund is a permanent fund bona fide
established for the sole purpose of providing life annuities or withdrawals from
retirement income drawdown accounts for the members of the fund or annuities or
withdrawals from retirement income drawdown accounts for the dependants or
nominees of deceased members.
A pension fund can provide annuities to the members after retirement and also for
dependants or nominees of the deceased member after his death. These annuities can also
be a “living annuity” (withdrawals from a “retirement income drawdown account”). One–
third of the fund value that becomes payable on retirement can be commuted for a lump
sum, whereas on death of the member the full fund value may be commuted for a lump sum.
A provident fund on the other hand is not restricted to providing annuities, but can provide
“benefits” for the members etc. A provident fund’s rules will thus dictate what type of
benefits a member will be entitled to. The rules can provide that on death or retirement the
entire benefit can be paid as a lump sum, or it can provide for annuities to be paid, or for a
combination of the two. In practice, most provident funds provide that the benefit can be
taken as a lump sum. It is expected that with the introduction of the “retirement income
drawdown account” (see living annuity below), more provident funds will provide for the
benefits to be taken in the form of a “retirement income drawdown account” which can be
commuted if the beneficiary wishes to do so.
The annuity that is payable by a retirement fund can be taken in different formats:
(i) Fixed Annuities (single life): With such an annuity, the annuitant receives a fixed
annuity amount which is determined at a rate of interest fixed in the agreement. If the
interest rates should change the annuity remains the same. It is thus an extremely safe
and low-risk investment that will provide the annuitant with a guaranteed and definite
return for the rest of his life. This annuity will continue to pay until the death of the
annuitant. It does, however, provide the option of a built-in guaranteed period which
can be up to 15 years. The longer the guaranteed period is, the smaller the actual
annuity will be. If the annuitant dies before the guaranteed period has expired, the
annuity will continue to pay for the balance of the guaranteed period. This annuity
does not provide for any increases.
(ii) Fixed Annuities (joint life): This annuity will pay until the death of the annuitant after
which it will continue to pay to the surviving spouse of the deceased annuitant until
the death of such spouse. If a guaranteed period is built in and the annuitant and his
or her spouse both die before the guaranteed period has expired, the annuity will
continue for the balance of the guaranteed period.
(iii) Escalating (growing) annuity: The annuity payable can be increased at a set percentage
every year. The higher the percentage is by which the annuity is to increase, the lower
the initial annuity will be. Some life insurers offer annuities that do not increase by a
set annual rate, but that are linked to inflation (inflation-linked annuity). An annuity
can also be linked to the investment performance of the fund that is paying the annuity
(with-profit annuity). As a general rule, escalating annuities commence with a lower
annuity payment than fixed annuities.
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(iv) Capital preservation plan (also called, back to back annuity): This is a combination of
an annuity and a life insurance policy. The annuitant selects a fixed annuity (an annuity
that will cease in the event of his death) and uses a portion of the annuity that he
receives every month to pay for the premiums on a life policy, that in the event of his
death will pay a death benefit which is equal to the amount that he invested in the
annuity on retirement. In the event of his death the amount paid by the life insurer is
received tax free.
(v) Living annuity: With this annuity, the investor chooses the frequency of his pension
(monthly, quarterly, six-monthly or annually) and his income level per annum which
must be not less than 2.5% p.a. and not more than 17.5% p.a. of the capital. The
investor also chooses the underlying assets and there is no guarantee on the product.
This means that the investor carries the risks of longevity, performance and inflation.
Other options available at retirement
A compulsory annuity is included in the gross income of the annuitant and consequently
taxable. This is also the case in respect of the drawdown taken from a living annuity and
retirement income drawdown account. A question that is often asked is what the
recommended maximum lump sum is that a person must take when he retires from a
retirement fund. In making that decision, many factors must be taken into account. One of
the main factors is the amount of income tax that the member will have to pay on the lump
sum benefit. This will depend on prior retirement fund lump sum benefits, retirement fund
lump sum withdrawal benefits and severance benefits received by the taxpayer. In the
examples that follow it is assumed that no prior lump sums were received.
8.1 Tasks
8.1.1 On 31 December 2018, Patrick will retire from his pension fund at the age of 60 years.
The total value of his interest in the fund at retirement date will be R3 300 000. He
is entitled to take a lump sum of one-third (R1 100 000). After his retirement, the
income from his pension fund interest will be his sole source of income. He will
receive no investment income other than what he may receive on the after-tax lump
sum benefit that he may select to take. He wants to know what factors are to be
taken into account in deciding whether or not to take a lump sum and if a lump sum
is to be taken, what the maximum amount of the lump sum must be.
Patrick must consider the following factors:
Firstly, he must take into account that the maximum lump sum that he is allowed to
take is R1 100 000.
The lump sum will be taxed at the rates set out in the table for Retirement & Death
Benefits or Severance Benefits. The first R500 000 is taxed at 0%. Should he take the
full amount, allowed as a lump sum, the balance (above R500 000) will be taxable.
The amount of income that he requires after retirement must also be considered. If
we assume that Patrick is 60 years old, he will have a tax threshold of R75 750. In
addition to this he will also qualify for the interest exemption (R23 800) under section
10(10)(1)(i)(vi) of the Income Tax Act. Including the interest he can thus have a gross
income of R99 550 before he will have to pay any income tax. In terms of the tax
table for individuals for the 20117/18 tax year, the first R189 880 of taxable income
15
is taxed at 18%. It follows that if he takes a drawdown of R189 880, he will pay tax
of R20 543 (R34 178 less rebate of R13 635). In addition to this he can receive tax-
free interest of R23 800. He can thus receive a total income of R213 680 and only pay
tax of R20 543. If he should take a bigger drawdown than R189 880, the next R1 taken
as a drawdown will be taxed at 26% under the tax tables (taxable income between
R189 881 and R296 540 is taxed at 26%). If he needs a higher income of say R259
780, the additional R60 900 will be taxed at 26%. Rather than taking the additional
drawdown of R60 900, it would be better to take another R60 900 to the lump sum
and thus take R560 900 rather than R500 000.
8.1.2 Dean cannot decide if he should purchase a conventional single life annuity or a living
annuity. Indicate and motivate which one of the following statements is incorrect:
(a) The benefit of a living annuity is that Dean and/or his beneficiaries will benefit
from the full fund value of the retirement funds.
(b) The benefit of a conventional single life annuity is that Dean is guaranteed an
income for the rest of his life.
(c) The benefit of a conventional single life annuity is that Dean can transfer the
funds to a living annuity at a later stage.
(d) The benefit of a living annuity is that Dean can change his income on an annual
basis, provided it is within the allowable drawdown percentages.
The statement in (c) is incorrect. A single life annuity cannot be transferred to a living
annuity; however, the fund value of a living annuity can be transferred to a
conventional single life annuity at a later stage.
9. Calculate the maximum tax deductions available to a client in respect of

contributions towards retirement funds.
Employer Contributions
• All employer-paid contributions to pension, provident and retirement annuity funds are
regarded as a deductible employment expense for the employer and a taxable fringe
benefit in the hands of the employee under the Seventh Schedule of the Income Tax Act.
• Where the employer is a partnership, it will be deemed to be the employer of the partners
for the purposes of this deduction.
Employee Contributions
Contributions to provident funds, pension funds and retirement annuities are all treated in
exactly the same manner.
The total deduction allowable in respect of a year of assessment may not exceed the lesser of
R350 000 or 27,5% of the higher of the person’s remuneration or taxable income.
9.1 Tasks
9.1.1 Ms Y is a 63-year-old employee and earns a salary of R180 000 per year. During the
2018/2019 tax year, in addition to her salary, she received:
• end-of-year bonus of R8 000
• dividends from SA companies of R12 000
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•interest of R22 000.

She is a member of the company pension fund and contributes 7.5% of her monthly
salary to that pension fund. She also contributes R1 000 p.m. to a retirement annuity
fund.
Calculate Ms Y’s taxable income for the 2018/2019 tax year.
Salary 180 000

Bonus 8 000
Dividends – SA 12 000
Interest 22 000
Gross Income 222 000
Less: Exemptions
Dividends – RSA 12 000
Interest (maximum R23 800) 22 000 (34 000)
Income 88 000
Less: Deductions
Pension (7.5 %) 13 500
RA (R 1 000 x 12) 12 000 (25 500)
Taxable income R162 500
9.1.2 Mr Craythorne is employed by a bank and his remuneration package is as follows:

• Salary: R800 000 per annum.
• Medical scheme contribution by his employer: R12 000 p.a. (non-retirement
funding).
• He is a member of the pension fund.
In his free time (after hours) Mr Craythorne acts as a consultant. He earns R500 000
p.a. doing this.
9.1.2.1 Mr Craythorne contributes 20% of his salary to the pension fund. Calculate how
much of the contributions to the pension fund he can deduct for tax purposes.
He contributes R160 000 to the pension fund and may deduct the entire contribution
(less than 27.5% and below the annual threshold of R350 000).
9.1.2.2 Calculate the maximum tax-deductible contribution that he can make to a

retirement annuity fund.
The deduction cap for retirement fund contributions is 27.5% of the greater of
remuneration or taxable income. This rate applies to the aggregate of contributions
made to his pension, provident and RA funds.
The annual deduction cap is R350,000 (including the cost of risk benefits). Therefore,
he may not deduct 27.5% of his taxable income (R360 800), since this would exceed
the annual limit of R350 000. He may only contribute R190 000 to the retirement
annuity, that will be deductible. Should he decide to contribute the full 27.5%, the
amount exceeding R350 000 will be carried over to the next tax year.
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9.1.3 Mr and Mrs Nuke Zealie, whose former spouses died tragically a couple of years ago,
married each other in community of property, during 2009. Based on the facts set
out, answer the questions that follow.
Mr Zealie, an industrial chemist working for a private company, receives the
following income during the tax year 2017/18:
Salary, non-pensionable R120 000
Company car, value including VAT (no distance records kept and R120 000
no maintenance plan)
Interest from bank R12 000
Unit trust investment * R35 000
*This pays a distribution of 6%, of which 60% is by way of dividend and 40% is by way
of interest.
Mrs Zealie receives the following income during the tax year 2017/18:
Rental from fixed property R20 000
(She claims R6 000 expenses in this regard for the year)
Salary (pensionable) R40 000
Dividend income R5 600
Interest income on behalf of her minor son from previous marriage R7 000
An annual widow’s pension from her previous marriage R36 000
9.1.3.1 Calculate the maximum tax-deductible retirement annuity for Mr Zealie.

Mr Zealie
Salary 120 000
Interest from bank [12 000 ÷ 2] 6 000
Company car 3.5 % [120 000 ⋅ 0.035] × 12 50 400
Unit trust income Dividend [35 000 × 3.6%] ÷ 2 630
Interest [35 000 × 2.4%] ÷ 2 420
Rental income [20 000 ÷ 2] 10 000
Dividends [5 600 ÷ 2] 2 800
GROSS INCOME R190 250
Mr Zealie’s maximum retirement annuity deduction will be 27.5% x R177 400 =

R48 785. This is less than the monetary cap of R350 000.
Gross income 190 250

Less: exemptions
Interest 6 420
Dividends unit trust 630
Dividends (other) 2 800 9 850
180 400
Less: deductions
Expenses (rental) [6 000 ÷ 2] 3 000
R177 400
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10. Understand living annuities and implement as part of retirement

planning.
The definitions of the different retirement funds allow a member to take any annuity that is
payable by the fund as a conventional or a “living annuity”. The latter term is defined in
section 1 of the Income Tax Act. In summary, the benefits of a living annuity are as follows:
(i) Although there are no guarantees provided, any capital that remains on the death of
the annuitant is preserved and can be taken as a cash lump sum or can be continued as
a living annuity by the person nominated to get the benefit.
(ii) Once the member has retired and the capital is held in the living annuity fund, the
retired member (annuitant) can nominate a beneficiary to receive the benefit on the
death of the deceased former member. Section 37C of the Pension Funds Act does not
apply and consequently the board of the fund does not have a say regarding who is to
get the benefits.
(iii) The capital in the living annuity is free of estate duty at the death of the annuitant.
(iv) If no beneficiary is nominated it forms part of the estate of the deceased annuitant. In
such a case it will attract executor’s remuneration in the estate of the deceased
annuitant.
(v) Any living annuity that is commuted for a lump sum on the death of the annuitant (that
could be the former member of the fund or his successor that was nominated as the
beneficiary) is taxable as a retirement fund lump sum benefit in the hands of the
deceased annuitant whose estate can recover the tax payable from the person to whom
the benefit accrues (the nominee who commuted the annuity).
(vi) If no beneficiary is nominated and the commuted lump sum is paid to the deceased
estate, the heirs of the deceased will inherit the benefit.
NOTE: An amount equal to the non-deductible contributions to a retirement annuity must be
included in the dutiable estate to close a potential tax loophole. Please refer to the chapter
on estate planning for further information.
10.1 Tasks
10.1.1 Ms Frates retires from her employer’s defined contribution retirement fund (pension
fund) at the age of 65 and also from her retirement annuity fund. Her total fund value
is R2 500 000 and consists of R1 500 000 in the pension fund and R1 000 000 in the
retirement annuity fund.
She has never been married and enjoys good health. She has no dependants and no
debt.
She is aware of the maximum cash that she may take from her retirement fund, but
is concerned about the tax that she will have to pay on a portion of the cash benefit.
In order to maintain her standard of living, she requires a taxable income of R120 000
per year. This retirement income must escalate at a rate of 6% per year.
She asks you for a recommendation regarding the application of her retirement
capital. She likes the concept of a living annuity, particularly as she would be able to
adjust the level of income from time to time to satisfy her income needs.
Other pertinent information:
• She has no other investments and her personal risk profile in respect of her
retirement capital is conservative. This can be aligned with her risk capacity.
19
• The interest rate on interest-bearing types of investments is 8% per year.

• The rate (net of all costs) of a compulsory purchase life annuity with a nil year
certain term, and which escalates at 6% per year, is R620 per year per R10 000
purchase sum.
10.1.1.1 Calculate the maximum 0% tax lump sum that Ms Frates can take from her
retirement funds on retirement.
Tax at 0% as per retirement table R500 000
This is assuming that she has not taken a retirement benefit after 1/10/2007 or a
withdrawal benefit after 1/3/2009.
10.1.1.2 Make a motivated recommendation in respect of the investment of the tax-

free lump sum.
Ms Frates qualifies for an interest exemption of R23 800 in terms of section
10(1)(i)(xv) of the Income Tax Act. At a rate of 8% p.a., she must invest the following
capital to earn R23 800 interest.
R23 800 ÷ 0.08 = R297 500
She should invest at least R297 500 in an interest-bearing investment at 8%.
This money can be used as an emergency fund while the balance of R202 500 would
then be invested in a conservative portfolio e.g. unit trusts to potentially earn greater
than 8% per annum and provide some capital growth.
10.1.1.3 Make a motivated recommendation regarding the investment of the balance

of the fund.
She can take a lump sum of R500 000 (R300 000 from the pension fund and R200 000
from the retirement annuity fund, or any combination as long as she adheres to the
maximum of one-third rule per fund) and use the remaining R2 000 000 to purchase
either a compulsory living annuity or a compulsory purchase life annuity. It is
assumed that the rules of both funds allow her to take a living annuity.
Option 1 – Compulsory living annuity
Living annuity income levels: Minimum 2.5% (proposals to change to 0%) and
Maximum 17.5%
If she were to draw R96 200 p.a. (R120 000 – R23 800), it will represent 4.8% of the
initial capital (R2 000 000) invested, and would be within the limits prescribed for
living annuities. The living annuity is recommended although it is not regarded as
conservative. The capital that she has available should be sufficient to provide the
increase of 6% in income for the rest of her life (assuming she lives till age 90 and
given the assumptions above).
Option 2 – Compulsory purchase life annuity
If she were to purchase a compulsory purchase life annuity, the annual income
escalating at 6% per annum would be:
R2 000 000 ÷ 10 000 × 620 = R124 000
This annual income combined with the interest from the interest-bearing
investments would total R147 800 (124 000 + 23 800). This is more than her required
income per annum. She should take factors such as flexibility, her investment
knowledge, inflation risk and longevity risk into account when making the decision.
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11. Understand and calculate the income tax implications of contributions

towards various retirement funds.
Since 1 March 2016 all contributions to pension -, retirement annuity - and provident funds
can now be deducted from an individual's taxable income. Please study the explanation of
deductible contributions in outcome 9 above.
11.1 Task
Julia (35 and single) will receive the following amounts during the tax year ending
28 February 2019:
Salary R650 000
Interest R30 000
Severance package at retrenchment R600 000
Taxable capital gain after selling a townhouse R300 000
Julia contributed R40 000 to her retirement annuity and her employer contributed R40 000
to her provident fund prior to the retrenchment. Calculate the maximum deductible
contribution Julia can make to her retirement annuity before the end of the tax year.
Salary R650 000

Fringe benefit R40 000
Interest R30 000
Gross income R720 000
Less: Exemptions -R23 800
Income R696 200
Less: Deductions (before sections 18A and 11(k)) R0
Taxable income before sections 18A and 11(k) R696 200
Plus: Taxable capital gain R300 000
Taxable income for calculation of 27,5% R996 200
27,5% R273 955
27,5% of taxable income is less than R350 000

Current contributions: R80 000
Julia may contribute a further amount of: R193 955
12. Understand and identify the nature of funds received from a retirement
fund upon retirement, dismissal, retrenchment, change in employment
and death as a withdrawal benefit or retirement benefit.
A retirement fund can pay a lump sum in the event of one of the instances listed below. These
lump sums fall into two categories namely: retirement fund lump sum benefits (RB’s) and
retirement fund lump sum withdrawal benefits (WB’s). These two categories of lump sums
are taxed under different tax tables (there is a separate tax table for each type). These tables
are updated from time to time and care should be taken to use the correct table when
calculating a client’s tax liability.
21
(i) The member’s retirement from the fund (this includes retirement prior to reaching
retirement age as a result of ill health, disability etc.) – taxed as per RB tax table.
(i) On the death of the member – the member is taxed as per RB tax table. The tax can be
recovered from the person who receives the lump sum benefit.
(iii) On retrenchment/redundancy of the member provided, certain requirements are met.
Such a lump sum is taxed as per RB tax table, but the member is allowed to transfer the
benefit tax free to another fund if he wants to avoid taxation at this point and preserve
his pension. It is important to note that the severance benefit does not include the
following: pro-rata bonus, severance notice and leave payments.
(iv) On resignation from the fund before the member has attained retirement age. Such a
lump sum is taxed as a WB benefit if it is taken in cash and not transferred to another
fund.
(v) An amount that is deducted from the minimum individual reserve of the member’s fund
as a result of an order of court for maintenance payments – such a lump sum is taxed
as a WB benefit in the hands of the member.
(vi) An amount that is deducted from the minimum individual reserve where part of the
pension interest of the member has been awarded to the non-member spouse under a
decree of divorce dated on or after 13 September 2007. The amount so deducted and
paid to the non-member spouse is taxed as a WB in the hands of the non-member
spouse if the amount was deducted from the fund minimum individual reserve on or
after 1 March 2009. Where the date of divorce was before 13 September 2007 and the
deduction from minimum individual reserve was made on or after 1 March 2009, the
amount deducted from minimum individual reserve and paid to the non-member is
completely tax free in the hands of both the member and the non-member spouse.
(vii) A lump sum paid on commutation of a compulsory annuity (including a “living annuity”
– such a lump sum is taxed as a RB benefit in the hands of the annuitant. If the annuity
is commuted by the nominee on the death of the annuitant (this can be on the death
of the former member or his or her successor) the annuitant is taxed but the tax can be
recovered from the nominee.
12.1 Tasks
12.1.1 John retired from a pension fund on 31 March 2016. He received an amount of
R400 000 from the fund as a lump sum. He took the balance (R800 000) of the fund
value in the form of a living annuity. After taking two monthly drawdowns from the
fund, he died on 1 June 2016. His wife Janine was nominated as beneficiary of the
living annuity and she decided to commute the remaining fund value for a lump sum
on her husband’s death.
12.1.1.1 Who was liable for the tax on the lump sum that John received at retirement
and according to which tax table was it taxed?
John was liable and the lump sum was taxed as a retirement fund lump sum benefit
(RB).
22
12.1.1.2 Who was liable for the tax on the lump sum benefit that was paid to Janine on
commutation of the living annuity?
John (his estate) was liable for the tax and his estate could recover it from Janine.
12.1.2 Renier (age 42) was retrenched by his employer on 31 January 2016. Renier was an
ordinary employee. He was neither a shareholder nor a director of the company. As
a result of his retrenchment, a lump sum benefit of R2 500 000 has become payable
to him in terms of the rules of the pension fund of which he is a member.
12.1.2.1 Advise Renier as to the tax consequences if he took the entire R2 500 000 as a
cash lump sum.
The R2 500 000 will be taxed as a RB in Renier’s hands, according to the Retirement
& Death Benefits or Severance Benefits Table.
12.1.2.2 Advise Renier as to the tax consequences if should decide not to take the lump
sum but to have it transferred for his benefit to a pension preservation fund.
If he transfers the benefit, he will qualify for a deduction of the amount so
transferred under paragraph 6 of the Second Schedule. He will then not be taxed at
that point but only at a later stage when he retires from the pension preservation
fund or takes a withdrawal from the preservation fund.
13. Calculate and give advice regarding taxation of lump sums received from
retirement funds and the deductions allowed in respect of the lump sums.
This outcome covers a large portion of the work and is adequately covered in your handbook.
A few examples are given below.
Retirement fund lump sum benefits
Retirement fund lump sum benefits are determined in terms of paragraph 2(1)(a) of the
Second Schedule. The amount to be included in gross income is the lump sum benefit minus
the aggregate amount of the deductions available to the taxpayer. Paragraph 5 provides the
deductions that can be claimed to determine the taxable retirement fund lump sum benefit.
Paragraph 5 deductions are:
(i) Member contributions that did not rank for deductions under section 11F;
(ii) Withdrawal amount (“minimum individual divorce withdrawal”) transferred into the
fund in terms of section 37D(4)(b)(ii) of the Pensions Funds Act;
(iii) Withdrawal benefit contemplated in paragraph 2(2)(b) deemed to have accrued to the
taxpayer (only if it was taxed – e.g. transfer from a pension to a provident fund);
(iv) An amount transferred to a pension preservation or provident preservation fund as an
unclaimed benefit and was taxed prior to such transfer;
(v) An amount transferred into the fund from a Government Pension Fund to a private
sector fund as represents the 0% tax portion (pre- 1 March 1998 tax-free amount)
transferred.
An amount previously deducted cannot be deducted again and the amount of the deductions
cannot exceed the lump sum.
23
The amount taxed at 0% in respect of a lump sum benefit received or accrued in consequence
of the retirement of a member is determined in the same manner as in the case of the death
or retrenchment of a member.
The first R500 000 that one receives from a retirement fund as a lump sum is tax at 0% and
this R500 000 is the total amount allowable and is cumulative over the member’s lifetime.
The R500 000 amount is built into the tax table. It is not a deduction.
The tax table for retirement lump sums ( 2018/2019 tax year) is:
Taxable income from lump sum benefits Rate of tax
Not exceeding R500 000 0% of the taxable income
Exceeding R500 000 but not exceeding R0 plus 18% of the taxable income
R700 000 exceeding R500 000
Exceeding R700 000 but not exceeding R36 000 plus 27% of the taxable income
R1 050 000 exceeding R700 000
Exceeding R1 050 000 R130 500 plus 36% of the taxable income
exceeding R1 050 000
The retirement tax table is cumulative of any previous lump-sum retirement benefits received
or accrued on or after 1 October 2007, and cumulative of any previous lump-sum withdrawal
benefits received or accrued on or after 1 March 2009, and any severance benefit received
on or after 1 March 2011. Tax under the table is calculated on the aggregate amount.
Steps to calculate tax on retirement fund lump sum benefit:
Step 1: Determine the lump sum.
Step 2: Determine the deductions available under paragraph 5.
Step 3: Determine the taxable lump sum by deducting the deductions from the lump sum.
Step 4: Determine the aggregate of the taxable lump sums (withdrawal and retirement lump
sum benefits and severance benefits) that were received prior to the current lump
sum benefit. Take the dates given above into account.
Step 5: Calculate the tax on the aggregate of the amounts calculated in steps 3 and 4. Use
the Retirement Fund Lump Sum Benefit (RB) tax table.
Step 6: Calculate the tax on the aggregate of the amounts calculated in step 4 only. Use the
Retirement Fund Lump Sum Benefit (RB) tax table.
Step 7: Deduct the tax calculated in step 6 from the aggregate of the tax calculated in step
5. The balance is the tax payable.
13.1 Tasks
13.1.1 On 1 March 2018 Mr Brand retired as managing director of a company at age 65 after
32 years of service. He had been a member of the pension fund since joining the
company. On 1 March 2006 he also became a member of the company’s provident
fund. Mr Brand expects his retirement capital to amount to the following:
Lump sum from pension fund (one-third) R800 000
Lump sum from provident fund R240 000
Deferred compensation payment R140 000
Accumulated leave pay R22 000
Annual bonus R48 000
24
Amount available from pension fund to purchase pension R1 600 000

(remaining two-thirds)
Monthly pension R18 000
His present salary is R480 000 per annum. His pension contributions are R2 250 per
month. Mr Brand’s present retirement annuity contributions are R400 per month
and he has contributed R108 000 to the provident fund over the past 12 years.
13.1.1.1 Calculate the taxable portion of Mr Brand’s retirement fund lump sum benefits
that he receives at retirement. He will not retire from the retirement annuity
fund now.
Lump Sums
Lump sum received from pension fund (⅓) 800 000
Lump sum received from provident fund 240 000
Total lump sum benefit on retirement 1 040 000
LESS: Member contributions to provident fund that did not qualify for 108 000
a deduction previously
(paragraph 5 deduction)
TAXABLE LUMP SUM R932 000
13.1.1.2 Calculate the tax payable on Mr Brand’s retirement fund lump sum benefits as
calculated in 13.1.1.1 above.
The amount of the tax payable on the 2018 (tax year) lump sum is calculated as
follows:
Taxable Lump sum benefit on retirement 932 000
ADD: Withdrawal benefits received on or after 1/3/09 0 A
ADD: Previous retirement lump sum benefits received on or after
1/10/07 0 B
TAXABLE LUMP SUM 932 000
Tax according to retirement, death and retrenchment table 98 640
LESS: Tax according to this table on A and B 0
Total tax payable R98 640
13.1.1.3 Calculate the total tax payable by Mr Brand for the tax year 2018/19.
(a) Calculation of the tax payable on Mr Brand’s deferred compensation payment
and accrued leave pay
Both the deferred compensation lump sum and the pay in lieu of leave will be
included in Mr Brand’s gross income in terms of paragraph (d) of the definition of
“gross income”. For tax purposes these two amounts can be added together and
treated as one. The total of R162 000 is taxable at his marginal rate of tax and no part
of it is exempt from tax.
25
Tax calculation for tax year ending 28 February 2019

Salary 480 000
Annual bonus 48 000
Deferred comp gratuity and leave pay 162 000
Gross income 690 000
Less: Exemptions 0
Income 690 000
Less: Deductions
Pension contributions (7.5% × R360 000 – fully 27 000
deductible since it is below 27.5% of taxable income)
RA contributions 4 800 31 800
Taxable Income 658 200
Tax on 658 200 (147 891 + 39% of taxable income above R187 905
555 600)
(b) Mr Brand’s total tax payable for the tax year 2017/18
Tax payable
on income for the 2018/2019 year R187 905
on pension and provident fund lump sums R98 640
Total Tax Payable R286 545
13.1.2 Mr Ahmad was a member of his employer’s pension fund for 30 years when he was
made redundant at the age of 53. The full pension fund withdrawal benefit of
R3 000 000 was then transferred to a pension preservation fund. Included in the
amount transferred were contributions that he made to the pension fund that did
not qualify for deduction under section 11(k) of the Income Tax Act. These
contributions amounted to R90 000.
Twelve years later in 2017, he retires from the preservation fund. At that time the
retirement interest in the fund is R6 000 000. He contemplates taking the maximum
cash sum from the fund.
13.1.2.1 Calculate the maximum cash that he may take and show all calculations.
The maximum cash (lump sum) that he can take is R6 000 000 ÷ 3 = R2 000 000.
ADD: Paragraph 5(a) member contributions that did not qualify for 90 000
s 11(k) or s 11(n) of the Act
Total amount R2 990 000
This is assuming that no retirement benefit has been taken after 1/10/2007 or a
withdrawal benefit after 1/3/2009
13.1.2.2 Calculate the tax payable if Mr Ahmad takes the maximum withdrawal as
calculated in 13.1.2.1 and show all calculations.
Determine the lump sum:
Mr Ahmad will retire from his pension fund only, so there are no other amounts to
add. The lump sum is R2 000 000.
26
Determine the deductions available under paragraph 5:

Paragraph 5(a) member contributions that did not qualify for s 11(k) or s 11(n) of the
Act (R90 000)
Determine the taxable lump sum:R2 000 000 – R90 000 = R1 910 000
Determine the aggregate of the taxable lump sums that were received prior to the
current lump sum benefit:
No previous withdrawals – R0 + R1 910 000 = R1 910 000
Calculate the tax on the aggregate of the amounts calculated (R1 910 000):
R130 500 + (36% x (R1 910 000 – 1 050 000)) = R440 100.
If Mr Ahmad takes ⅓ of his pension fund value, the tax payable will be R440 100.
13.1.2.3 Mr Ahmad is giving serious consideration to taking the maximum cash benefit,
paying the tax thereon, and then using the after-tax cash as a consideration for
a voluntary purchase life annuity, as he has learned that such an investment is
“tax-efficient”. What would you advise in respect of the investment of the
discretionary cash if the following circumstances apply?
• The voluntary life annuity rate is R1 500 per annum per R10 000 consideration.
• A compulsory purchase life annuity rate is R1 500 per annum per R10 000
consideration.
Mr Ahmad is married out of community of property. He does not have any other
investments. He will use R410 000 of his withdrawal to provide for an emergency
fund and a holiday with Mrs Ahmad.
Determine which option would give Mr Ahmad the higher annual income after taking
the maximum cash
• Option 1 – Purchasing a voluntary life annuity with the after-tax cash, after
provision for the emergency fund and holiday, or
• Option 2 – Purchasing a compulsory annuity with the balance after taking the
R410 000 for his emergency fund and holiday. Show all calculations.
Option 1 – Voluntary Purchase Annuity

The after-tax portion after provision for the emergency fund and holiday is
R1 149 900
2 000 000 – 440 100 – 410 000 = 1 149 900
1 149 900 ÷ 10 000 × 1 500 = 172 485
His life expectancy per the tables at age 65 is 13.936 years
The capital element is: 1 149 900 ÷ 13.936 = 82 513
The taxable portion of the annuity is:
172 485 – 82 513 = 89 972
Taxed per tax rates at 18% is 16 195
Gross annual annuity 172 485
Less: Tax (before rebate) 16 195
Net annual annuity after tax 156 290
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Option 2 – Compulsory Purchase Annuity

Should he purchase a compulsory annuity with the balance of the one-third after
R590 000 has been taken to invest in an emergency fund and use for the holiday, the
annuity will be:
2 000 000 – 440 100 – 410 000 = 1 410 000
1 410 000 ÷ 10 000 × 1 500 = 211 500
Gross annual annuity 211 500

Less tax: 34 178
+ 26% on > 189 880 5 621
Total tax (before rebate) 39 799
Net annual annuity after tax 171 700
Therefore, purchasing the compulsory purchase annuity will yield the greater annual
income.
13.1.2.4 Jones will retire from his pension fund on 31 November 2019. His total fund
value is expected to be R5 000 000. Total contributions not allowed as
deductions = R200 000. Jones has not received any previous lump sums. He
plans to commute the full ⅓ on retirement. Calculate the tax payable by Jones.
Total pension: R5 000 000
Maximum lump sum: R1 666 667
Deductions: R-200 000
Taxable lump sum: R1 466 667
= R130 500 + ((R1 466 667 – R1 050 000) × 36%)

= R280 500
17% of the total lump sum (R1 666 667) will be sacrificed. It is important that the
client understands this and the implications for his total portfolio and planning.
Furthermore, it is important that the client understands that he may withdraw up
to a third of his fund, but that it is not compulsory to do so.
Taxation of withdrawal benefits from a retirement fund and preservation funds
Retirement fund lump sum withdrawal benefits are determined in terms of paragraph 2(1)(b)
of the Second Schedule. Paragraph 2(1)(b) provides that the amount that is to be included in
a person’s gross income is the aggregate of three different types of withdrawal benefits:
(i) Deduction from minimum individual reserve in terms of a divorce order – in practice
divorce on or after 13 September 2007;
(ii) Benefits transferred to other funds for the benefit of the person from a fund of which
the person was previously a member;
(iii) Other lump sum benefits which are not retirement/death benefits or withdrawals as
above.
Paragraph 6 (a) and (b) contain amounts that can be deducted from a retirement fund
withdrawal benefit.
Paragraph 6 (a) contains deductions that are transferred to other approved funds.
28
Paragraph 6 (b) deductions against other lump sums (cash withdrawals) are the aggregate of:
(i) Member contributions that did not rank for deductions under section 11(k) or 11(n).
(ii) Any amount transferred into the fund from which the taxpayer now withdraws and was
transferred as a result of an election made in terms of section 37D(4)(b)(ii)(cc) of the
Pensions Funds Act.
(iii) An amount transferred into the fund on previous withdrawal from another fund and was
taxed on such transfer.
(iv) An amount transferred to a pension preservation or provident preservation fund as an
unclaimed benefit and was taxed prior to such transfer.
(v) An amount transferred into the fund from a Government Pension Fund to a private
sector fund as represents the tax-free portion (pre- 1 March 1998 tax-free amount)
transferred.
The amounts are not deductible if it was previously allowed and cannot exceed the lump sum.
The rules pertaining to preservation funds are of particular importance as are the new
definitions of “pension preservation fund” and “provident preservation fund”. A significant
consequence of these new definitions is that the requirement for an employer/employee
relationship has been removed.
Taxation of withdrawal benefits
The Taxation Laws Amendment Act of 2009 brought into effect a new withdrawal tax table.
This tax table is cumulative of any previous lump-sum withdrawal benefits received or
accrued on or after 1 March 2009 and also cumulative of any previous lump-sum retirement
benefits received or accrued on or after 1 October 2007. In both cases, the amount that is
taxed at 0% (R25 000 in the case of withdrawal and R500 000 in the case of retirement/death)
is a lifetime amount.
If the member elects to transfer his withdrawal benefit to another approved fund, taxation is
deferred. If the member elects to withdraw his benefit after 1 March 2009, the benefit is
taxed in accordance with the following table:
Taxable Income (R) Rate of Tax (R)
0 – 25 000 0% of taxable income
25 001 – 660 000 18% of taxable income above 25 000
660 001 – 990 000 114 300 + 27% of taxable income above 660 000
990 001 and above 203 400 + 36% of taxable income above 990 000
13.1.3 Mr Grievous received a withdrawal lump sum from his pension fund of R200 000 on
1 April 2009 and then on 1 April 2018 he received a further withdrawal lump sum
from his provident fund of R700 000. Calculate the tax payable after the withdrawal
on 1 April 2016.
Taxable lump sum (1/04/2018) 700 000
Plus: prior withdrawals (1/4/2009) 200 000
TAXABLE LUMP SUM 900 000
The WB tables must be used
Tax payable on taxable lump sum:
Tax on R900 000 (WB table used)
29
114 300 + (27% x (900 000 – 660 000) 179 100

Less: Tax on R200 000 (WB table used)
(200 000 – 25 000) x 18% 31 500
Tax payable on WB of R700 000 147 600
13.1.4 Mr Zille received a withdrawal lump sum benefit from his pension fund A of R122 500
on resignation from his employment on 1 April 2009. On 1 October 2009, he receives
a further R200 000 when he resigned from pension fund B. He withdrew R300 000
from his pension fund C on 1 November 2010 when he resignation.
On 1 April 2017, he retired from his pension fund D and received a retirement lump
sum of R277 500. A total amount of R100 000 of his contributions to the fund were
not allowed as a tax deduction in terms of section 11(k) of the Act. The calculation of
tax payable when he retired on 1 April 2017 is:
Taxable lump sum (Pension Fund 1/4/2017) R277,500
LESS: Deductions para 5 contributions not deductible -R100,000
R177,500
ADD: Previous withdrawals (after 1/3/2009)
1 April 2009 – R122,500
1 Oct. 2009 – R200,000
1 Nov. 2010 – R300,000 R622,500
TAXABLE LUMP SUM R800,000
As the last lump sum was a retirement lump sum the RB table must be used.
Tax payable on taxable lump sum:
Tax on R800 000 (RB table used) R36,000
+ 27% on > R700 000 R27,000 R63,000
Less: Tax on R622 500 (622 500 – 500 000) × 18% -R22,050
Tax payable on RB of R277 500 R40,950
Severance benefits
The 2010 Taxation Laws Amendment Act brought in a table specifically for employment
severance payments. There is now a table for severance benefits as defined. From
1 March 2011, a severance benefit must be aggregated with retirement fund lump sum
benefits and retirement fund lump sum withdrawal benefits.
14. Explain the effect of divorce on retirement as well as the taxation thereof.
Under section 7(7) of the Divorce Act, a spouse’s pension interest in a retirement fund forms
an asset in his or her estate for the purposes of the division of the estates at date of divorce.
Under section 7(8) of that Act, the court can assign a portion of the pension interest of the
member spouse to the non-member spouse. The amount so assigned to the non-member
spouse can be deducted from the minimum individual reserve of the fund. The non-member
does not have to wait until an accrual takes place to the member before the payment can be
made. This clean-break approach is applicable to divorces both before, on and after
13 September 2007 (date on which the “clean break” approach was enacted). A member will
30
have a notable decrease in their retirement benefits and it is essential that remedial action is
taken before retirement to ensure that their retirement planning is not compromised.
Tax consequences:
If the decree of divorce is dated PRIOR to 13 September 2007, the amount paid to the
non-member spouse is entirely tax free (in the hands of both the member as well as the
non-member spouse). If, on the other hand, the amount assigned to the non-member
spouse is deducted from the minimum individual reserve of the member’s fund and the
decree of divorce is dated ON or AFTER 13 September 2007, the amount paid to the non-
member spouse is included in the gross income of the non-member spouse. In the latter
case, the non-member spouse is thus liable for the tax on the amount received as a
withdrawal benefit. The non-member spouse can in such a case avoid the tax by
transferring the amount to another approved fund. The non-member spouse will be liable
for tax even if the claim is instituted after the date of the member’s withdrawal from the
fund.
15. Formulate and draft a retirement plan for a client that meets the
objectives of retirement planning and the needs and goals of the client
This outcome pulls all the different strings together so that you are expected to do a
comprehensive retirement plan for a client. Most of the elements of this outcome are part of
the previous outcomes.
15.1 Tasks:
15.1.1 Mrs Impassa (date of birth January 1974) was divorced from her husband in 2009. In
terms of the divorce order, her ex-husband had to pay her monthly maintenance
until her death.
However, maintenance payments would cease upon the sale of his farm, when the commuted
value of the maintenance payments would be payable as a lump sum. The farm has now been
sold and she has received a final settlement of R950 000. One year ago, she was permanently
employed as a marketing co-ordinator at an exporting company. Her current salary is R15000
per month and her marginal tax rate is 18%.
She has no dependants and has no intention of remarrying.
Her other personal particulars and wishes are as follows:
• She wants to retire at the age of 65 and retirement income is to be provided to her until
age 95 (i.e. for 30 years). The income is to be equal to 75% of her final salary and must
escalate at the CPI rate.
• Current value of the provident fund of which she is a member is R25 000. The net
contribution to her provident fund is R21 000 per annum, and is made annually in
advance.
• In the event of disability, her employer will pay her 75% of her salary up to her normal
retirement age 65 and full contributions to the provident fund will be maintained. The
contribution and the disability income will escalate at the CPI rate.
• The mortgage loan on her townhouse is currently R420 000 and the bond interest rate is
9.5% p.a. She intends maintaining a bond instalment of R3 700 per month in arrears.
31
Another financial planner has drawn up an investment and retirement plan for her and has
made certain recommendations. She now approaches you with the request to check the
calculations and to comment on the recommendations and assumptions made.
Assumptions made:
(a) The future CPI rate is 6% p.a.
(b) The net return on all investments made prior to and after retirement is 10% p.a.
(c) Mrs Impassa’s salary will increase at a rate of 2 percentage points above the CPI rate and
she will receive a further 19 salary increments.
(d) The bond interest rate will remain at 9.5% p.a.
(e) Divorce settlement of R950 000 will be invested for a term of 20 years. The investment
will grow at a rate of 10% p.a.
Financial calculations made:
1. Projected final salary at retirement = 64 736 per month.
2. Projected value of provident fund at age 65 = R2 555 044.
3. Outstanding balance of bond at retirement = R268 126.
4. Commuted value of pension required from age 65 = R10 357 524
5. Value of divorce settlement at retirement = R4 427 909
6. These calculations were all made in January 2019.
The other financial planner has made the following recommendations:
(i) Invest R650 000 in a single premium endowment policy to age 65.
(ii) Effect a retirement annuity without life cover to age 65 to fund the deficit. Contributions
are to be paid annually.
You are required to do the following:
Check the answer of each of the financial calculations made by using the given assumptions.
Show your calculations, irrespective of whether you agree with the given figures or not. Take
into account that the calculations were made in January 2019. Your own calculations must
also be done as if it was done in January 2019.
Comment on the other financial planner’s recommendations.
Calculation of projected final salary at retirement:

180 000 PV
8% I/YR Inflation + 2%
19 N Years to retirement -1 (given)
FV R776 826 Per year
R64 736 Per month
Therefore, the projected final salary at retirement is R64 736 per month.
Calculation of projected value of provident fund at age 65:

Future value of current fund value:
R25,000 PV
20 N Years to retirement
10% I/YR Growth rate
32
FV R168 187
Future value of future contributions

1 P/YR
Begin mode
R21,000 PMT
10% Growth
8% Income escalation
1.8519% Resultant rate
20 N
PV R354 791
0 PMT
10% I/YR
FV R2 386 857
FV of contributions R2 386 857

FV of current value R168 187
Projected value of fund at retirement R2 555 044
Calculation of the outstanding balance on bond at retirement:

12 P Y/YR
End mode
R420 000 PV
R3 700 PMT
20 Shift N (years to retirement)
9.5% I/YR (bond rate)
FV R153 029
Therefore, the outstanding balance on the bond at retirement is R153 029
Calculation of commuted value of pension required from age 65:

Projected salary at retirement R776 826
75% of final salary R582 620
1 P/YR
Begin mode
R582 620 PMT
10%
6%
3.77358% Resultant rate (4÷1.06 = 3.77358)
30 N (Years in retirement)
PV R10 748 374
This figure has been calculated incorrectly by the financial advisor who gave the advice. He
calculated it to be R10 357 524.
33
Calculation of the value of divorce settlement at retirement:

950 000 PV
20 N Years to retirement
10% I/YR Growth rate
FV R6 391 125
Advisor’s calculation was incorrect.
Calculation of needs less provisions at retirement:
Available
Provident fund R2 555 044
Divorce settlement R6 391 125
R8 946 169
Required
Commuted value of required pension R10 748 374
Outstanding bond R 153 029
R10 901 403
Shortfall: R-1 955 234

Comments on the other financial planner’s recommendations:
(i) Investment in a single premium endowment policy:
Mrs Impassa’s marginal rate of tax is 18% which is less than the tax attributable
to an endowment policy. Endowments are taxed according to the four funds
approach and are taxed at 30%. Therefore, this recommendation is not
suggested.
(ii) Invest in an RA with annual premiums:
As all of Mrs Impassa’s taxable income is from retirement funding income, there
is no tax advantage in investing in an RA. An RA is a good investment vehicle with
both advantages and disadvantages. In Mrs Impasssa’s circumstances, an RA can
still be an effective savings vehicle, sincehe has 20 years till retirement and a
shortfall that needs to be addressed. Have sufficient discretionary capital (from
the sale of the farm) and can benefit from the tax deduction in the years till
retirement, as well as the 0% tax on growth in the fund.
Taking all the above into account, Mrs Impassa has a shortfall in her retirement
capital. She can either continue working after age 65; reduce her monthly living
expenses in retirement, or both. Another recommendation would be for Mrs
Impassa to start saving in an appropriate savings vehicle to cover the shortfall. These
recommendations are only some of the possibilities available to Mrs Impassa.
34

LFPP5800 - Unit 2 - Retirement Planning 2020

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LFPP5800 - Unit 2 - Retirement Planning 2020

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LFPP5800 – Personal Financial Planning

Relevant information to be studied with this Unit:

Suggested Study Method:

Learning outcome for this Unit

1. Understand the life cycles important for retirement planning.

2. Understand the impact of the matrimonial property regimes on

The requirements are:

3. Determine the client’s retirement objectives and goals.

5. Calculate the capital available at retirement.

6. Calculate the income needed for retirement.

Discretionary Retirement Investment

6.1.1.1 Calculate the capital shortfall at retirement.

Age when RA matures: 55

Calculate the total capital required at retirement:

6.1.1.2 Calculate if there is sufficient capital available.

Calculate value of retirement annuity fund at retirement:

7. Understand the functioning of different retirement funds.

On retirement from a pension fund (including a retirement annuity fund and a

Previously a member’s retirement benefit accrued on the retirement date stipulated

It is important to note that the single allowable withdrawal applicable to

Existing members of retirement funds are encouraged to preserve their retirement

7.2 Retirement annuity funds

7.3 Pension preservation funds and Provident preservation funds

Take note: Postponement of annuitisation requirements

The tax harmonisation of contributions to retirement funds had been implemented

7.4 Summary of tax-free transfers between funds:

8. Explain the different types of benefits that can be expected from a

employees or deceased former employees or solely for a combination of such purposes or

9. Calculate the maximum tax deductions available to a client in respect of

•interest of R22 000.

Salary 180 000

9.1.2 Mr Craythorne is employed by a bank and his remuneration package is as follows:

9.1.2.2 Calculate the maximum tax-deductible contribution that he can make to a

9.1.3.1 Calculate the maximum tax-deductible retirement annuity for Mr Zealie.

Mr Zealie’s maximum retirement annuity deduction will be 27.5% x R177 400 =

Gross income 190 250

10. Understand living annuities and implement as part of retirement

• The interest rate on interest-bearing types of investments is 8% per year.

10.1.1.2 Make a motivated recommendation in respect of the investment of the tax-

10.1.1.3 Make a motivated recommendation regarding the investment of the balance

11. Understand and calculate the income tax implications of contributions

Salary R650 000

27,5% of taxable income is less than R350 000

Amount available from pension fund to purchase pension R1 600 000

Tax calculation for tax year ending 28 February 2019

Determine the deductions available under paragraph 5:

Option 1 – Voluntary Purchase Annuity

Option 2 – Compulsory Purchase Annuity

Gross annual annuity 211 500

= R130 500 + ((R1 466 667 – R1 050 000) × 36%)

114 300 + (27% x (900 000 – 660 000) 179 100

Comment on the other financial planner’s recommendations.

Calculation of projected final salary at retirement:

Calculation of projected value of provident fund at age 65:

Future value of future contributions

FV of contributions R2 386 857

Calculation of the outstanding balance on bond at retirement:

Calculation of commuted value of pension required from age 65:

Calculation of the value of divorce settlement at retirement:

Shortfall: R-1 955 234

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