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 your retirement interest, with reference to that living annuity arrangement, if at any time the retirement interest becomes less than R50 000.
The lump sum portion of the retirement interest is taxed using special tax rates upon retirement, as indicated below:
Taxable income from lump sum benefits
Rates of tax
Not exceeding R500 000
0 per cent of taxable income
Exceeding R500 000 but not exceeding
18 per cent of amount by which taxable income exceeds R500 000
Exceeding R700 000 but not exceeding
R1 050 000
R36 000 plus 27 per cent of amount by which taxable income exceeds R700 000
Exceeding R1 050 000
R130 500 plus 36 per cent of amount by
which taxable income exceeds R1 050 000
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
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 threshold is as follows:
- 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
- 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.
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.