This blog takes a closer look at tax and retirement, whether it be planned or unplanned forced retirement, and the potential planning opportunities available to you in this regard.
As a starting point, it’s important to grasp the following basic rules that apply to retirement savings.
A retirement annuity can only be accessed from the age of 55 years after which the taxpayer will be entitled to a lump sum withdrawal that’s limited to one third of the investment value. A full cash withdrawal is only allowed when the total retirement capital is less or equal to R247,500.
In certain instances, the capital can be accessed by the taxpayer before the retirement age of 55 years:
- When the policyholder is totally and permanently disabled
- When the value of the fund is less than R7,000
- When the taxpayer ceased to be a South African tax resident for at least three years.
As an employee benefit, a pension fund can only be accessed by an employee upon resignation, retrenchment, and retirement. The full proceeds can be accessed upon resignation and retrenchment, while access upon retirement is limited to one third of the lump sum.
A provident fund is also a benefit an employer can offer their employees, and just like a pension fund, a provident fund can only be accessed by the employee upon resignation, retrenchment, and retirement. The full proceeds can be accessed upon resignation and retrenchment.
As the name implies, a preservation fund preserves capital until retirement. So upon resignation and retrenchment, a pension/provident fund can be transferred to a preservation fund for safekeeping. The rules and tax benefits of the pension/provident fund are retained within the preservation fund. Once a pension/provident fund is transferred to a preservation fund, the taxpayer isn’t allowed to withdraw any funds before the age of 55. The earliest age one can retire from the preservation fund is 55 years.
Tax on retirement savings
Let’s start with the retirement lump sum withdrawal tax table that’s applicable once you reach retirement age. The table below indicates the tax payable for the 2023 tax year ending on 28 February 2023.
|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 2023 tax year ending.
|Lump sum||Rate of tax (R)|
|0 – 25||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/pay-out 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.
Retirement planning considerations
- Access to capital in retirement funds is dependent on the rules of the funds. It’s also subject to tax once the funds are accessed.
- A well-defined and 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 or endowment structures and 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 they are accessible before retirement age. This would be essential when planning for early retirement or FIRE.
- Consider a goal-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 pay-out.
Being tax efficient is an important part of great financial management. In this blog, a group of South African tax experts at AJM Tax 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.