Retirement Funds:Withdrawal Options and Tax Implications
Check out the first installment of this 2-part series on retirement funds.
The importance of planning for one’s retirement cannot be overstressed. It’s crucial that you prepare for the time when you will no longer be working and not generating a steady stream of income.
The problem is however, that trying to understand the various types of retirement funds out there can be rather challenging.
In the first part of our 2-part series on retirement funds, we looked at the basics of the thre most widely used retirement products in South Africa:
- Provident Funds
- Pension Funds
- Retirement Annuities
In this second installment, we address the withdrawal options and the tax implications associated with these retirement funds.
Withdrawal Options and Taxation Prior to Retirement
|Cash Lump Sum||Provident Fund||Pension Fund||Retirement Annuity|
|The full amount can be withdrawn in cash or the following variations are also allowed:
||No withdrawals are allowed prior to age 55 except in the event of the full fund value of the retirement annuity being less than R7000.In the event of the member ceasing contributions to the fund and emigrating then a full withdrawal will be allowed.|
|Withdrawals are taxed according to the Withdrawal Table:R0 – R22 500: 0% of the cash lump sum
R22 501 – R600 000: 18% of the cash lump sum exceeding R22 500
R600 001 – R900 000: R103 950 plus 27% of the cash lump sum exceeding R600 000
R900 001 and above: R184 950 plus 36% of the cash lump sum exceeding R900 000
Example of a Withdrawal From a Pension Fund Prior to Retirement:
Mr. Y resigns from his employer with a Pension Fund value of R1 000 000 and decides that he would like to withdraw his full fund value.
The fund value is then taxed as follows:
- R184 950 plus 36% of the cash lump sum exceeding R900 000
- R184 950 plus [(R1 000 000 – R900 000) x 36%]
- R184 950 + R36 000 = R220 950 tax payable
After deducting the tax payable Mr. Y will receive the remaining fund value of R 779 050
- R1000 000 – R220 950 = R 779 050
Options and Taxation at Retirement
|Provident Fund||Pension Fund||Retirement Annuity|
|The full fund value can be taken as a lump sum.||⅓ of the total value can be taken as a lump sum, the remaining ⅔ must be invested in an annuity to provide the annuitant* with an income.However if the full fund value is R75 000 or less, then the full fund value may be withdrawn and the above rule does not apply.||⅓ of the total value can be taken as a lump sum, the remaining ⅔ must be invested in an annuity to provide the annuitant with an income.However if the full fund value is R75 000 or less, then the full fund value may be withdrawn and the above rule does not apply.|
|Retirement benefits are taxed according to the Retirement Table:R0 – R315 000: 0% of taxable income
R315 001 – R630 000: R0 plus 18% of taxable income exceeding R315 000
R630 001 – R945 000: R56 700 plus 27% of taxable income exceeding R630 000
R945 001 and above: R141 750 plus 36% of taxable income exceeding R945 000
*Annuitant– someone who receives an annuity
Example of a withdrawal from a Pension Fund at retirement:
At retirement Mr. Z has a retirement annuity fund value of R3 000 000. He would now like to make his ⅓ cash withdrawal of R1 000 000 and will invest the remaining ⅔ in an annuity.
The fund value will be taxed as follows:
- R141 750 plus 36% of the cash lump sum exceeding R945 000
- R141 750 plus ((R1 000 000 – R945 000) x 36%)
- R141 750 + R19 800 = R161 550 tax payable
After deducting the tax payable Mr. Z will receive the remaining fund value of R 838 450
- R1000 000 – R161 550 = R 838 450
- The remaining ⅔ totalling R2 000 000 will be transferred tax free to the annuity of Mr. Z’s choice.
Due to the various product structures and tax treatments involved with retirement products it’s recommended to consult with a financial planner to determine the most feasible way to go about exploring your options for retirement funds whether you’re at the beginning or end of your retirement planning journey.