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’s a few tips on the tax.
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 R700 000
|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 any 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 for the 2016 tax year (i.e. 1 March 2015 to 29 February 2016) is as follows:
• 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.
So just as when you were working 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).
Retirement Lump Sum Benefits
Tax relief on retirement lump sum benefits is allocated once in a lifetime in other words if it’s used up you can’t claim it again. For example, if a person used R300 000 of the R500 000 with the first lump sum, the balance left is R200 000 and once this is used up this relief is not available again. For more details on how it works, read the SARS Budget Tax Guide.
Retirement fund lump sum benefits consist of lump sums from a pension, pension preservation, provident, provident preservation or retirement annuity fund on death, retirement or termination of employment due to attaining the age of 55 years, or an event such as sickness, an accident, injury, incapacity, or due to redundancy or termination of the employer’s trade.
Severance benefits consist of lump sums from or by arrangement with an employer due to relinquishment, termination, loss, repudiation, cancellation or variation of a person’s office or employment.
Tax on a specific retirement fund lump sum benefit or a severance benefit (lump sum or severance benefit Y) is equal to –
- Tax determined by applying the tax table to the aggregate of Y plus all other retirement fund lump sum benefits accruing from October 2007 and all retirement fund lump sum withdrawal benefits accruing from March 2009 and all other severance benefits accruing from March 2011; less
- Tax determined by applying the tax table to the aggregate of all retirement fund lump sum benefits accruing before lump sum Y from October 2007 and all retirement fund lump sum withdrawal benefits accruing from March 2009 and all severance benefits accruing before severance benefit Y from March 2011.