Tax and retirement

Congratulations on your retirement. We believe that your retirement should be enjoyed and that you should not stress about tax. Therefore here are a few tips on the tax in respect of retirement.

Tax Treatment of lump sums paid by retirement funds

When you retire as a member of a pension fund, pension preservation fund or retirement annuity fund and you wish to take a portion of your retirement interest as a lump sum, you are allowed to take (commute) a lump sum equal to a maximum of one-third of the retirement interest in that fund, unless the entire value of the fund does not exceed
R247 500 in which case you may take the full retirement interest as a lump sum.

When you retire and you are a member of a provident fund or provident preservation fund, your retirement interest is usually paid by way of a lump sum unless the rules of such a fund provide for the payment of an annuity on a member’s retirement.
 
If you are already retired and in receipt of annuity income from a living annuity arrangement, you are allowed to commute the amount as a lump sum, if at any time the full remaining value of the assets becomes less than R50 000.
Tax will be calculated on the gross retirement fund lump sum benefit after having taken into account, for example, contributions to a retirement fund which did not previously rank for deduction or which were not exempted from normal tax.

Basically what this means is that an individual is entitled to claim a deduction of contributions made to certain retirement funds. However, these contributions, for tax purposes, are subject to limitation. If the deduction is limited, the amounts are carried forward to the following year of assessment and are compounded. When the individual retires, for example, the compounded or excess contributions that did not previously rank for deduction or which were not exempted, can be used to reduce the gross lump sum figure on which the tax will be calculated, This will be illustrated by way of an example below.
 
The lump sum is taxed upon retirement using special tax rates, as indicated below:

Taxable income from lump sum benefits
Rates of tax
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
​​Example

X received a lump sum of R682 000 from the ABC Pension Fund, and had received no previous lumps sums prior to this. Over many years, the total contributions which did not previously rank for deduction or qualify for exemption in X’s hands amounted to R50 000. Calculate the normal tax payable on this lump sum.
 
Result
 
The gross lump sum on which normal tax will be calculated amounts to R682 000 less R50 000, which equals R632 000. R632 000 falls within the taxable income bracket of R500 001 to R700 000. The normal tax is therefore 18% of the taxable income above R500 000. Thus:
 
Normal Tax
= 18% of (R632 000 - R500 000)
= 18% of R132 000
= R23 760

The normal tax on the lump sum of R682 000 therefore amounts to R23 760, and the net lump sum after tax (“cash in pocket”) would equal R658 240.

It is important to note that ALL lump sums received from a retirement fund, whether as a result of retirement or not (and from an employer in respect of a severance benefit)  are taxed on a cumulative basis. The significant impact of this is that, when the member eventually retires, the total value of all the lump sum benefits received by the member after 1 October 2007, will be taken into account when calculating the tax payable on the member's current retirement fund lump sum benefit.

Tax treatment of annuity income - see changes from last year

As indicated above, the two thirds of the retirement interest in respect of pension, pension preservation or retirement annuity is received in the form of an annuity (regular pension). If the income from your annuity exceeds the tax threshold, tax is payable on the amount. The tax thresholds are as follows:
 
  • For the 1 March 2017 to 28 February 2018 year of assessment for the tax season starting during 2018:
    • Person below 65 – R75 750 per annum
    • Person 65 and above but not yet 75 – R117 300
    • Person 75 and above – R131 150.

 

  • For the 1 March 2016 to 28 February 2017 year of assessment for the tax season starting 1 July 2017:
    • Person below 65 – R75 000 per annum
    • Person 65 and above but not yet 75 – R116 150
    • Person 75 and above – R129 850.

  • For the 1 March 2015 to 29 February 2016 year of assessment for the tax season that started 1 July 2016:
    • Person below 65 – R73 650 per annum
    • Person 65 and above but not yet 75 – R114 800
    • Person 75 and above – R128 500

See more tax rates here.

It is important to note that, taking the above factors into account, even if you are no longer working, but are in receipt of annuity income, you might still continue paying tax. Each year you will have to declare your income from your annuity and any other income (e.g. investments income) you may have on your tax return (ITR12).

 
So those are some basic principles.
 
And enjoy your retirement.
 
Last Updated: 08/06/2017 11:32 AM     print this page
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 Top FAQs

What happens when I have paid more contributions into my retirement annuity fund (RA) in a year than I can claim against tax?
The excess amount will be carried over to the next tax year.