Few countries allow retired people to live tax-free. Along with the UK and US and many other nations, South Africa taxes its pensioners – the income tax tables are the same for everyone, working and retired. However, certain concessions ensure that people of 65 years and older pay less tax than the rest of the population.
Taxes on retirement savings
At retirement, you can take up to one-third of your accumulated retirement-fund savings as a lump sum. This is taxed according to the SARS’s retirement lump-sum benefits tax table (see here), which currently allows you the first R550 000 tax-free. This tax-free amount is reduced by any tax-free lump sums you may have received in severance benefits since 1 October 2007.
The remaining two-thirds (or more) of your savings, which is not taxed, must be used to “buy” a pension, of which the two main types are living annuities and life annuities.
If, during your working life, you contributed more into your retirement savings than the tax-deductible ceiling (27.5% of the higher of your remuneration or taxable income, up to R350 000 per year), the excess amounts, known as “disallowed contributions”, can be used to reduce your tax in retirement by being offset against your retirement lump sum or against your pension income.
Tax on income
You are subject to tax on your income from a life or living annuity and from any other sources, such as rental income from a property or trading income from a business. If you draw a regular amount from a discretionary investment, such as a unit trust or share portfolio, this is not considered taxable income, although in such an investment you are subject to taxes on capital gains, interest and dividends (see below).
You pay PAYE tax on your monthly annuity income, but if you have income from other sources you may have to register with SARS as a provisional taxpayer.
If you buy a voluntary purchase life annuity (a life annuity bought with discretionary as opposed to retirement savings), only the interest portion of the monthly annuity payment is taxable in your hands. (SARS has a formula for determining the interest portion.)
Income tax rebates and thresholds
At current (2025/26) tax rates, there is a tax rebate of R26 629 (primary + secondary rebates) for taxpayers aged 65 to 74 and a rebate of R29 824 (primary + secondary + tertiary rebates) for taxpayers of 75 and older.
The current annual tax threshold (below which you do not pay tax) for taxpayers aged 65 to 74 is R148 217 (R12 351 per month) and for taxpayers of 75 and older it is R165 689 (R13 807 per month).
Taxes on discretionary investments
• Unit trusts and exchange-traded funds: these are subject to tax on interest (in your hands, subject to the exemption, see below), on dividends (20% withheld) and capital gains tax (CGT) on gains when you sell units or switch funds, subject to exemptions and thresholds (see here).
• RSA Retail Bonds: you pay tax on interest, subject to the exemption. In an inflation-linked bond, you pay tax on your interest income plus on the inflation-linked amount by which your capital increases.
• Bank deposits: you pay tax on interest, subject to the exemption.
• Share portfolios: you indirectly pay the 20% tax on dividends and CGT on gains made when you sell shares. Realised losses may be deducted from realised gains or rolled over to the following tax year. If you are buying and selling shares regularly, SARS may regard you as a trader, in which case gains are taxed as income.
• Offshore investments: interest and dividend distributions, property rental income and capital gains are subject to tax in South Africa. Depending on the country, you may claim credits on taxes deducted by that country.
Exemption on interest income
Whether received as income or reinvested, interest from interest-bearing investments is added to your taxable income, subject to an annual exemption of R34 500 for over-65s.
Medical tax credits
Pensioners can claw back higher amounts on medical expenses via the medical tax credit system. You get credits in two ways:
1. On contributions to a medical scheme: R364 a month each for the principal member and first dependant such as a spouse, totalling R728, and R246 for any additional dependents. If you are 65 years or older you may also claim 33.3% of your contributions that exceed three times the amount of the initial medical tax credit to which you are entitled.
2. On allowable “out-of-pocket” medical expenses not paid for by your medical scheme. If you are 65 years or older you may claim 33.3% of these expenses.
Note that these credits act like rebates, deducted from the tax amount you owe SARS.
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