Taxation of cash lump sum payments on retirement If you take a retirement benefit from the Fund, you can choose to take up to one-third of the total amount as a cash benefit. You may be entitled to a tax-free (tax-exempt) cash lump sum of up to R500 000 if you take part of your retirement benefit from the Fund in cash. Any cash lump sum retirement benefit that you take in excess of the tax-free amount will be subject to tax.
Any contributions that were not previously tax-deductible will also be taken into account and will be added to the R500 000 limit, thus increasing the possible tax-free amount.
However, it is important to note that, in our current understanding, any gratuity that you may receive from Parliament or your Legislature will also count towards this tax-free amount if you are aged 55 and older- you cannot receive the tax-free amount twice (once from the Fund and again from the gratuity).
Also, the tax-free amount is reduced by any tax-free amounts that you have received previously on withdrawal (resignation) or retirement. In other words, the tax-free amount of R500 000 counts as a “lifetime allowance”.
SARS states that “the tax on a specific retirement fund lump sum benefit (Y) is equal to:
- “the tax determined by applying the tax table (below) to the aggregate of that lump sum 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; minus
- “the 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.”
|Taxable Amount||Rate of Tax|
|R0 to R500 000||0%|
|From R500 001 to R700 000||R0 plus 18% of taxable income exceeding R500 000|
|From R700 001 but not exceeding R1 050 000||R36 000 plus 27% of taxable income exceeding R700 000|
|Exceeding R1 050 001||R130 500 plus 36% of taxable income exceeding R1 050 000|
Taxation of your monthly pension benefit
Whatever part of your retirement benefit you do not take as a cash lump sum must be used to buy a pension annuity from an insurance company. This part of your retirement benefit is paid directly by the Fund to the insurance company that you choose, and thereafter the insurance company (not the Fund) pays you a monthly pension.
You will pay income tax in the usual way on the monthly pension you receive. Income tax (PAYE) will be calculated and deducted by the insurance company each month, when paying you the pension. It is important to note that, if you have income from more than one source (e.g. pensions arising from two different retirement funds), you may have to pay extra tax when you are assessed by SARS – this is because SARS will combine the two incomes when calculating how much tax you owe.