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Taxation of retirement funds

A general rule applicable to all retirement fund savings are that your and your employer’s contributions to the fund are tax free (as they are deducted from your income) and the growth and income within the fund is tax free. You only have to pay tax once you withdraw your funds and the applicable tax rates will depend on when you withdraw. If you withdraw on or after retirement you will receive the most tax benefits.

Deductibility of contributions

Your contributions to a retirement fund are fully tax deductible up to an amount of R350 000 per annum or 27,5% of your annual income, whichever is less.

When you make them, retirement contributions fall into the “Deductions” part of your income tax equation which we considered in Lesson 2.

Lump Sum Withdrawals

To consider the tax implications of lump sum withdrawals, we first quickly recap what was discussed in the previous topic. For pension and provident funds you may withdraw up to a one third or up to R247 500, whichever is greater, of your retirement savings as a lump sum benefit at your retirement at age 55 or older. Furthermore, if you leave your employment, you may also withdraw up to one third of your retirement savings if you have a provident fund or pension fund.

The tax implications for a lump sum withdrawal from your retirement savings differ depending on when the withdrawal is made.

If your employment is terminated prior to the age of 55 and you elect to withdraw a third of your pension or provident fund, the cash lump sum that you withdraw is taxed at the following rates (applicable for 2023 year of assessment):

WithdrawalRates of Tax
0 – R25 0000 %
R25 001 – R660 00018% of withdrawal above R25 000
R660 001 – R990 000R114 300 + 27% of withdrawal above R660 000
R990 001 and aboveR203 400 + 36% of withdrawal above R990 000

If you withdraw a third of your pension fund, provident fund or RA as a cash lump sum when you retire after the age of 55, you will be taxed at the following rates (applicable to the 2023 year of assessment):

WithdrawalRates of Tax
0 – R500 0000 %
R500 001 – R700 00018% of withdrawal above R500 000
R700 001 – R1 050 000R36 000 + 27% of withdrawal above R700 000
R1 050 001 and aboveR130 500 + 36% of withdrawal above R1 050 000

From the above, it is clear that the tax implication for a lump sum cash withdrawal are much more favourable if you wait until retirement to withdraw from your retirement savings.

Taxation of annuity payments after retirement

As we have mentioned previously, you may withdraw up to a third of your retirement savings as a cash lump sum when you retire after the age of 55. The remaining two thirds must be used to purchase an annuity which pays you a monthly / quarterly / annual income until your death.

These payments will fall under your “gross income” in your income tax equation which means that you will be taxed at the normal tax rate applicable.