2020 saw us having numerous conversations with clients heading into retirement (planned and unplanned, forced early retirement). To keep up with this theme, this blog will look at the tax consequences associated with retirement and key opportunities to consider when planning your retirement.
Let’s first consider the following basic rules that apply to the different retirement savings vehicles:
Retirement Annuity (RA)
- Earliest access age: 55 years
- Lump sum withdrawal: Limited to one-third of the investment value
- Full cash withdrawal allowed when proceeds are R247,500 or less
- Instances where capital can be accessed before the retirement age of 55 years:
- When the policyholder is totally and permanently disabled;
- If the fund value is less than R7,000;
- Upon financial emigration (emigrate for exchange control / SARB purposes)*.
Pension Fund
- Only accessible through an employer
- Accessible upon resignation, retrenchment and retirement
- Access to full proceeds upon resignation and retrenchment
- Limited access to one third lump sum upon retirement
Provident Fund
- Only accessible through an employer
- Accessible upon resignation, retrenchment and retirement
- Access to full proceeds upon resignation, retrenchment and retirement
Preservation Fund
- Upon resignation and retrenchment, a provident and pension fund can be transferred to a preservation fund to preserve capital until retirement
- Pension and provident fund rules and tax benefits are retained within the preservation fund
- One full or partial withdrawal is allowed before the age of 55 once pension/provident fund is transferred into the preservation fund
- The earliest age one can retire from the preservation fund is 55 years
Tax on retirement savings
The table below indicates the tax payable for the 2021 tax year ending on 28 February 2021. (It’s worth noting that this table has not been adjusted for the last five tax years!)
| Lump sum | Rate of tax (R) |
| 0 – 500 000 | 0% of taxable income |
| 500 001 – 700 000 | 18% of taxable income above 500 000 |
| 700 001 – 1 050 000 | 36 000 + 27% of taxable income above 700 000 |
| 1 050 001 and above | 130 500 + 36% of taxable income above 1 050 000 |
For withdrawals before retirement, the table below applies for the 2021 tax year ending on 28 February 2021. (This table has also not been adjusted for the last five tax years!)
| Lump sum | 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 |
Remember, the lump sum is a lifetime aggregate and isn’t determined on a per withdrawal/payout basis. This means that the tax payable is based on the overall lump sum. So if you’ve made a previous withdrawal, it gets added to any future withdrawals when determining the tax payable.
Consider the following when planning for retirement
- Access to capital in retirement savings is dependent on the rules of the funds (see above) and subject to tax when the funds are paid out.
- A well-defined comprehensive retirement plan includes sufficient discretionary savings to supplement compulsory savings (retirement funds and compulsory annuities) to ensure flexibility and balance. Consider local and offshore sinking funds (accounts used to save money for a specific purpose), endowment structures or local tax-free savings accounts (TFSA) to supplement retirement savings adequately and tax efficiently. These products provide tax relief without limitation on the underlying assets and are accessible before retirement age. This would be essential when planning for early retirement or FIRE.
- Consider a goals-based approach when planning for specific capital needs at retirement, not only from an asset allocation perspective, but also from a product structuring perspective.
- If you get offered a severance package for early retirement, ensure that you apply for the appropriate tax directive to optimise the severance payout (HR should normally attend to this).
*Financial emigration should only be considered under very specific circumstances (to be discussed in more detail in the blogs to follow).
Tax Tuesday blog
Being tax efficient is an important part of great financial management. In this blog, a group of South African tax experts share their tips and explanations on tax issues. Learn everything you need to know about tax, from deductions you never knew about to retirement savings and capital gains. The first Tuesday of every month is Tax Tuesday. Don’t miss it!