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 lumpsum.
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.
Tax will be calculated on the gross retirement fund lump sum benefit after having taken into account, for example, contributions to a retirement fund that 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 a deduction of contributions made to all retirement funds. However, these contributions, for tax purposes, are subject to a limitation. If the deduction is limited, the amounts are carried forward to the following year of assessment and may be allowed as a deduction in the following year of assessment. Amounts that are not allowed as a deduction in any year of assessment, as a result of the limitation, are accumulated. When the individual retires, for example, the accumulated 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.
The retirement fund lump sum benefit is taxed upon retirement using special tax rates, as indicated below:
| Taxable income (R) | Rate of tax |
|---|---|
| 1 – 550 000 | 0% of taxable income |
| 550 001 – 770 000 | 18% of taxable income above 550 000 |
| 770 001 – 1 155 000 | 39 600 + 27% of taxable income above 770 000 |
| 1 155 001 and above | 143 550 + 36% of taxable income above 1 155 000 |
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.
See the Retirement Lump Sum benefits webpage with information on the taxation of lump sum benefits and severance benefits.
Tax treatment of annuity income
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 2025 year of assessment (1 March 2024 – 28 February 2025) – No changes from last year
- R95 750 if you are younger than 65 years.
- If you are 65 years of age to below 75 years, the tax threshold (i.e. the amount above which income tax becomes payable) is R148 217.
- For taxpayers aged 75 years and older, this threshold is R165 689.
For the 2024 year of assessment (1 March 2023 – 29 February 2024)
- R95 750 if you are younger than 65 years.
- If you are 65 years of age to below 75 years, the tax threshold (i.e. the amount above which income tax becomes payable) is R148 217.
- For taxpayers aged 75 years and older, this threshold is R165 689.
- R91 250 if you are younger than 65 years.
- If you are 65 years of age to below 75 years, the tax threshold (i.e. the amount above which income tax becomes payable) is R141 250.
- For taxpayers aged 75 years and older, this threshold is R157 900.
- R87 300 if you are younger than 65 years.
- If you are 65 years of age to below 75 years, the tax threshold (i.e. the amount above which income tax becomes payable) is R135 150.
- For taxpayers aged 75 years and older, this threshold is R151 100.
- R83 100 if you are younger than 65 years.
- If you are 65 years of age to below 75 years, the tax threshold (i.e. the amount above which income tax becomes payable) is R128 650.
- For taxpayers aged 75 years and older, this threshold is 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.
And enjoy your retirement.
Related Documents
ASPOA – Authority on Special Power of Attorney by Tax Practitioner – External Form
FORM-AD – Request for Tax Deduction Directive Pension and Provident Funds – External Form
FORM-B – Request for Tax Deduction Directive Pension and Provident Funds – External Form
FORM-C – Request for Tax Deduction Directive Retirement Annuity Funds – External Form
FORM-E – Tax Deduction Directive After Retirement and Death Annuity Commutations – External Form
LAPD-IT-G03 – Guide on the calculation of the tax payable on lump sum benefits
LAPD-VAT-G04 – VAT 411 Guide for Entertainment Accommodation and Catering
LAPD-VAT-G05 – VAT 412 Guide for Share Block Schemes
RC01 – Application for Certificate of Residence for Individuals – External Form
SPPOA – Special Power of Attorney – External Form
TPPOA – Special Power of Attorney to Tax Practitioner – External Form
Frequently Asked Questions
FAQ: 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...
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