Retirees on more than one pension should expect more tax to be withheld from March

If you are receiving a pension from more than one fund or annuity, you may find your pension fund administrator deducting more tax from March 1 this year.

The South African Revenue Service (SARS) has found that too little tax is deducted throughout the year from retirees receiving multiple incomes.

Pensioners who have more than one annuity then face having to pay in when their incomes are combined and assessed at the end of the tax year.

You may be receiving more than one pension or annuity income if you saved in different retirement funds and the funds bought different annuities, or you used your savings to buy different annuities. 

Each pension fund administrator deducts tax from these annuities based only on the pension they pay you, without taking into account any other pensions you earn.

Tax rate higher on combined income

The reason why your combined retirement incomes may require you to pay more tax than that which is deducted when the different income streams are taxed in isolation, is that:

• You may fall into a higher income tax bracket;
• Each retirement fund administrator taxes you on income you earn above the tax threshold – in other words, the income exemption is applied multiple times to each annuity instead of only once to your combined income.

SARS says that this problem can arise for anyone with multiple sources of income from which employees’ tax – known as Pay As You Earn (PAYE) is deducted.

Pensioners have in the past been given the option to increase the amount of tax that their retirement fund administrator deducts, to avoid having to pay in on assessment.

According to SARS, however, not many pensioners are making use of this option.  

Jenny Gordon, head of Technical Advice Investments, Product and Enablement at Alexander Forbes, says problems arise on assessment as many taxpayers do not have enough liquidity to pay the tax they then owe SARS.

Attempt to avoid tax owing

To assist pensioners who have more than one source of income, legislation was recently introduced that allows SARS, based on recent information it has on your income, to determine a more accurate PAYE deduction amount.

SARS plans to introduce this with effect from March 1.

For pensioners who have only one source of income, the normal PAYE tables will continue to be applied by administrators, Gordon says.

In the case of pensioners with more than one income, Gordon says the legislation provides for SARS to issue a directive to fund administrators and insurers to deduct a flat rate of tax from the pension or annuity which they administer. SARS has agreed with retirement fund administrators and insurers to provide these directives in February each year.

Beware of opting out

Taxpayers receiving more than one pension income have an option to opt out of the new tax deduction – they can request their retirement fund administrator to use the normal PAYE deduction rate, and not the one provided by SARS, Gordon says.

However, anyone who does opt out of the new deduction may then be faced with paying in the outstanding tax when their income is assessed at the end of the tax year, Gordon warns.

Peter Stephan, senior policy adviser for the Association of Savings and Investments South Africa, says SARS has asked the administrators to warn retirees that if they do opt out of having the fixed tax applied, they are at risk of being liable for tax which they will have to settle when their tax return is assessed.

If they are found to owe SARS tax, these taxpayers must not say they were taken by surprise and they do not have the money to pay the tax, because they were warned of the consequences, he says.

Gordon says SARS has sent letters to the affected retirees.

How tax rates are calculated

Administrators have been issued with the fixed rate directives but are still dealing with some queries, she says.

The fixed rates will be updated with the new tax rates and rebates which will be announced in the budget.

However, this may be too late for some administrators, and they may load the current tax rates. In this case the current rates will be applied for the first month of the new tax year and updated with the new rates from April.

In a letter SARS sent to administrators, it explains that the flat rate has been calculated using the income that retirement fund administrators declare to SARS on your behalf and the income tax calculated on this remuneration less the tax rebates and medical scheme credits to which you are entitled.

SARS has determined the tax due as a percentage of your combined income and instructed administrators to deduct tax at that percentage.

Joon Chong, a partner at Weber Wentzel, says It is not yet clear whether in future SARS may potentially adjust this flat tax rate to take into account any rental and interest your earned and any taxable capital gains realised in previous tax years.

SARS says if you start drawing a pension from a new source during a tax year, that pension will be taxed in line with the normal tax tables until the directive is issued by SARS in February and a new tax rate can be applied from March the following tax year.