Important Retirement Funding and Tax Notes

July 2011

What happens to your retirement funding when you are retrenched or when you retire?

What are the tax rules and what happens to your money?

Here is a quick overview. It would be wise, however, to also have a more detailed discussion with your financial adviser about your unique situation and options.

At retirement:

- If you have a provident fund: you have access to all your retirement savings as a cash lump sum

- If you have a pension fund or retirement annuity (RA): you have access to 1/3 of your savings as a cash lump sum

- If you have a pension fund or RA: 2/3 must buy a pension for life

- The first R315 000 of the lump sum plus any contributions that you were not permitted to deduct against your taxable income, is tax free

- The next R315 000 is taxed at 18% and the next R315 000 is taxed at 27%

- From R945 001 (the cumulative total) you are taxed at 36%

- Amounts you receive are cumulative and are taxed according to the accumulated total of all withdrawals from the fund and its corresponding tax rate.

When you resign from your job:

If you withdraw all your savings from an occupational retirement fund, the first R22 500 is tax-free. Any amount between R22 501 and R600 000 is taxed at 18%. The next R300 000 is taxed at 27% and any amount over R900 000 at 36%.

When you are retrenched:

- Note that things are more complex - so in this case always consult and involve your employer and financial advisor in your decision making.

- Expect the same treatment of your cash lump sum as detailed under "At retirement" above, if: 1) your services are terminated prior to your normal retirement age due to your employer having ceased to carry on, or intending to cease to carry on, the trade in respect of which you are employed or appointed; or 2) you have become redundant because of your employer having effected a general reduction in personnel or a reduction in personnel of a particular class.

- From the age of 55 for tax purposes, depending on the rules of your fund, you can decide to take early retirement rather than resign, in which case your lump sum will be taxed according to the R315 000 tax-free table and not the R22 500 tax-free table.

- As of this tax year, from March 1, any severance package is included in the lump sum calculations (adding to your cumulative total).

Despite the squeeze on financial resources, you may have to resist the temptation to view a retirement/retrenchment payout as a bonus pay-day. Your financial security is involved.

This article was initially published by Warren Ingram of RBS Insurance Brokers

Alexis Sacks

Dave Rich

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