BUSINESS NEWS - Recent calls from pensioners for tax-free retirement income reflect a very real concern facing many retirees: managing rising living costs while relying on a reduced income.
For households already under financial pressure, paying tax on retirement income can feel like an additional burden.
However, according to Shameer Chothia, Principal Consultant at Momentum Consultants and Actuaries, the retirement system needs to be viewed within the broader economic landscape.
Tax and the social safety net
While removing tax on retirement income may seem like a solution for struggling pensioners, taxation plays an important role in supporting South Africa’s wider social security system.
A significant number of South Africans reach retirement age without formal savings or employer-backed retirement benefits.
Revenue collected through taxation contributes towards funding social support programmes, including grants administered through the South African Social Security Agency (SASSA).
Chothia explains that although taxation can be challenging for retirees, it also helps sustain a broader safety net for vulnerable households.
“Tax revenues revert directly back into society,” he says, pointing out that some lower-income retirees receive both modest private pensions and state support.
Retirement planning starts long before retirement
The frustration around retirement taxation often stems from a much earlier challenge - many people simply do not have enough time or resources to plan adequately.
According to Chothia, retirement planning consists of three key phases: accumulation during working years, preservation before retirement, and managing income after retirement.
Phase 1: Building retirement savings
When households are struggling to cover everyday expenses, saving for a retirement that may be decades away can feel impossible.
This is why employer-based retirement structures and automatic enrolment systems are important, says Chothia.
By encouraging employees to save from the start of their careers, automatic enrolment helps individuals benefit from decades of compound growth and tax advantages that they may otherwise miss.
The impact of the Two-Pot retirement system
South Africa’s retirement landscape has also changed with the introduction of the Two-Pot retirement system.
Previously, one of the biggest threats to retirement security was members withdrawing their entire retirement savings when changing jobs. This reduced long-term capital and limited future retirement income.
The Two-Pot system allows limited access to retirement savings during financial emergencies, but early withdrawals are subject to income tax. The remaining retirement component must be preserved, providing a safeguard against completely depleting retirement savings.
Phase 2: Making use of retirement allowances
At retirement, the tax system provides significant relief for those who have preserved their savings throughout their working lives.
Current legislation allows qualifying individuals to access a tax-free retirement lump sum of up to R550 000.
With proper financial planning, retirees can structure their retirement income and investments in a way that makes use of available allowances while reducing unnecessary tax exposure.
Chothia says retirement tax should not be viewed as a punishment, but rather as part of a regulated system designed to encourage long-term saving.
Phase 3: Understanding tax after retirement
Once retirees purchase an annuity, their regular income is taxed according to personal income tax rates.
However, because most retirees earn less than they did during their working years, many fall into lower tax brackets. Basic tax thresholds also mean some lower-income retirees pay little or no income tax.
The challenge, says Chothia, is that many people do not fully understand how retirement taxation works.
The advice gap
Access to professional financial advice remains one of the biggest challenges facing South Africans preparing for retirement.
Research from the Bureau of Market Research shows that financial advice participation increases significantly among higher-income households, leaving many lower- and middle-income earners without guidance.
The research found that among households earning between R10 001 and R15 000 per month, only 5% of women and 4% of men consult a certified financial adviser.
For those earning between R15 001 and R25 000 per month, financial advice uptake increases slightly to 6,1% among women and 9,2% among men.
Only in the highest income category - households earning more than R70 000 per month - does financial adviser participation reach higher levels, at 15,8% for women and 20,8% for men.
This highlights a major concern: the people who may benefit most from retirement planning and tax guidance are often the least likely to receive professional advice.
Changing the retirement conversation
Chothia believes the focus should move beyond simply removing tax on pensions and towards creating a stronger culture of early retirement preparation.
Greater employer involvement, improved access to financial education and affordable professional advice could help more South Africans enter retirement with confidence.
“When working South Africans understand the full lifecycle of tax - benefiting from deductions during their careers and using allowances available at retirement - tax stops being viewed as a surprise penalty,” he says.
Instead, he argues, it becomes a tool that supports both individual financial security and broader social resilience.
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