Lump Sum Benefits

Taxation Laws Amendment act, 2007

The taxable portion of the lump sum on death or retirement is taxed separately from the other taxable income of the taxpayer at the following tax rate :

RETIREMENT OR DEATH

Taxable amount Tax Liability
Up to R500 000 0%
R500 001 - R700 000 18% x taxable amount in excess of R500 000
R700 001 - R1 050 000 R 36 000 + 27% of the amount above R700 000
R 1 050 001 and above R 130 500 750 + 36% of the amount above R 1 050 000

ON WITHDRAWAL FROM THE FUND

With effect from 1 March 2009, the exempt portions, upon withdrawal, will be as follows :

PENSION FUNDS

The tax-free portion will be R25 000 plus any amount paid into any approved pension fund or retirement annuity fund

RETIREMENT ANNUITY FUNDS

The tax-free portion will be R25 000, plus the amount paid into another retirement annuity fund or used to purchase an approved insurance policy that provides benefits similar to a retirement annuity fund.

PROVIDENT FUNDS

The tax-free portion will be R25 000, plus any amount paid into any approved pension, provident or retirement annuity fund.

The taxable portion of a lump sum upon withdrawal from a fund will be taxed separately from other taxable income. The rate will be as follows :

WITHDRAWALS FROM RETIREMENT SAVINGS

Taxable amount Tax Liability
R0 - R25 000 0%
R25 001 - R660 000 18% of the amount above R25 000
R660 001 - R990 000 R114 300 + 27% of the amount above R660 000
R990 001 and above R203 400 + 36% of the amount above R990 000

In all cases, the tax-free portions from either a pension, provident or retirement annuity fund shall not be less than the lesser of the lump sum benefit or any contributions made to the fund by the member which were not previously allowed as deductions.

Click here for tax implications on Retirement funds and ILLAs (2012)

New Proposed Rules on Withdrawal of Pension, Provident Funds, Preservations Funds is NOT YET being applied by SARS.

The new changes to tax on withdrawal (As announced in the Budget Speech for 2009) have not yet been promulgated into law. This causes much confusion as Sars is applying the new R22500 tax free allowance but the balance of the benefit is still being taxed at old average rates as was the case prior to 1/3/2009. SARS have confirmed that they will only change their systems to apply the table when it is passed into law which they expect will be in the latter part of this year. As the expectation is that it will apply retrospectively to 1 March 2009 SARS have advised that any member who is over taxed as a result of this will be reimbursed with their next assessment. (i.e. 2010 tax year.)

  • Small annuities - retirement benefits of R75 000 or less, may now be commuted in full as a lump sum. Previously pension and retirement annuity funds could pay out only up to one third of the retirement benefit in a lump sum and the balance of the fund was used to purchase a compulsory annuity and only benefits of R25 200 could be commuted in full.

  • Draft legislation to be tabled in Parliament shortly should bring relief to divorcees who have been unable to access their share of their former spouses' retirement funds despite recent changes to the law and a ruling on the matter by the Pension Funds Adjudicator. A Personal Finance report says the draft General Financial Services Laws Amendment Bill contains provisions to amend the Pension Funds Act to clearly state that every divorcee who has been awarded a share of a former spouse's retirement fund in a divorce order will be able to access the benefits with effect from 13 September 2007. The efforts of many divorcees who were divorced before this date to access these benefits have been thwarted by retirement funds and their administrators, which claimed that the law was unclear. An amendment to the Pension Funds Act promulgated in September was intended to introduce a 'clean break' in pension interests on divorce for all divorcees. But legal advisers to funds and their administrators argued that it was incorrectly drafted and applied only to divorce orders made after the amendment was promulgated.