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 sum benefits 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. The remaining two-thirds will be paid out in the form of an annuity (a regular pension). However, if your total retirement interest in the fund does not exceed R247 500, you may take the full retirement interest as a lump sum.
Currently, 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 R125 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 all 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 can be claimed as a deduction in the following year of assessment. Amounts that are not claimed as a deduction in any year of assessment, as a result of the limitation, 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 retirement fund lump sum benefit for the 2020 tax year is taxed upon retirement using special tax rates, as indicated below:
|Taxable income from lump sum benefits||Rates of tax|
|1 – 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|
X received a retirement fund lump sum benefit of R682 000 from the ABC Pension Fund, and had received no previous lump sum benefits or severance benefits. Over many years, the accumulated retirement fund 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 benefit.
The retirement fund lump sum benefit 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:
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 from a pension, pension preservation or retirement annuity fund is received in the form of an annuity (a 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 2023 year of assessment (commencing 1 March 2022 and ending 28 February 2023):
- Person below the age of 65 – R91 250 per annum
- Person aged 65 and above but not yet 75 – R141 250
- Person aged 75 and above – R157 900.
- For the 2022 year of assessment (commencing 1 March 2021 and ending 28 February 2022):
- Person below the age of 65 – R87 300 per annum
- Person aged 65 and above but not yet 75 – R135 150
- Person aged 75 and above – R151 100.
- For the 2021 year of assessment (commencing 1 March 2020 and ending 28 February 2021):
- Person below the age of 65 – R83 100 per annum
- Person aged 65 and above but not yet 75 – R128 650
- Person aged 75 and above – R143 850.
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 may be required to declare your income from your annuity and any other income (e.g. investments income) you may have on your tax return (ITR12).
For more information on tax and retirement, please refer to the Guide on the calculation of the tax payable on lump sum benefits.
So those are some basic principles.
And enjoy your retirement.