SA's No 1 Insurance Blog

“We need R200,000 urgently. Can you cash in our pension fund?”

What seemed a simple enough instruction, turned out to be my biggest nightmare when I received a call from them two weeks later.

“Why were we only paid R130,000?”

Believe me, that’s not the best message to receive first thing on a Monday morning.

  • First, you’re losing a client’s investment completely when they cash in. It’s not as if they’re buying a living annuity with the money, and secondly,
  • I was responsible for the advice. Where did I go wrong in my tax calculation?

Now you might know a thing or two about retiring but let us assume you know nothing.

Let’s start long before retirement. In fact, let’s see…

What happens when you withdraw from a preservation fund?

The word ‘withdraw’ is polite terminology for ‘resign’. In other words, something that happens before retirement involving cashing in your pension or provident fund.

The one bit of good news is that SARS (South African Revenue Services) doesn’t include this money in your standard tax calculation. They use a separate tax table for this.

Basically, you’re allowed R25,000 as a tax-free withdrawal. Thereafter, they tax you in various brackets according to the amount you wish to withdraw.

In 2018 it goes like this:

  • R0 to R25,000 – 0% of taxable income
  • R25,001 to R660,000 – 18% of the taxable income above R25,000
  • R660,001 to R990,000 – R114,300 plus 27% of the taxable income above R660,000
  • R990,001 and above – R203,400 plus 36% of taxable income above R990,000

So, by now you’re thinking, great, I can take R25,000 tax-free!

Well, that all depends on how many times you’ve cashed in your pension or provident funds in the past. That’s because the R25,000 is a lifetime, once-off amount and applies across all funds. If you’ve used this exemption in the past, don’t expect another.

This is what SARS does when you withdraw

The first thing SARS does, is haul out your dark and dreadful past.

All the following are lumped together, and tax is calculated according to the table above:

  • The current withdrawal you’re considering
  • All retirement fund lump sum withdrawals from March 2009
  • All retirement fund lump sum benefit accruing from October 2007 (This includes death benefits paid to beneficiaries as well as cash withdrawals from a living annuity where the annuitant has passed on)
  • All severance benefits accruing from March 2011

Then they deduct from that sum, all the tax payable on the following according to the tax tables:

  • All retirement fund lump sum withdrawals prior to this one, and accruing from March 2009
  • All retirement fund lump sum benefit accruing from October 2007 (This includes death benefits paid to beneficiaries as well as cash withdrawals from a living annuity where the annuitant has passed on)
  • All severance benefits accruing from March 2011

So yes, this is complicated, but this is the takeaway:

  • Have you ever withdrawn from any pension or provident fund after March 2009?
  • Has any pension or provident fund benefits accrued to you after October 2007 (Remember that with a death benefit, the first R500,000 is paid tax-free (if it hasn’t already been used) ?, and
  • Have you ever taken a severance package after March 2011?

If any of these apply, then get some tax advice before taking the cash…or chat to SARS.

Now, getting back to our client who had one more option…

What happens when you retire from a preservation fund?

The good thing was that she could officially retire from her investment. This opened a world of opportunity for us.

Once again SARS doesn’t include retirement lump sums in your standard tax calculation. A separate tax table is used which applies to;

  • Death,
  • Severance, and
  • Retirement.

This time around they allow you a R500,000 tax-free withdrawal. Thereafter, you get taxed in various brackets according to how much you wish to withdraw.

It goes like this (2018):

  • R0 to R500,000 – 0% of taxable income
  • R500,001 to R700,000 – 18% of taxable income above R500,000
  • R700,001 to R1,050,000 – R36,000 plus 27% of the taxable income above R700,000
  • R1,050,001 and above – R130,500 plus 36% of taxable income above R1,050,000

Obviously, it makes a lot more sense to retire than to withdraw. I mean, think for a moment. What if you were about to cash in R1 million?

  • If you chose to withdraw, you’d end up paying somewhere in the region of R114,300 in taxes.
  • If you chose to retire, you’d end up only paying somewhere around R36,000 in tax.

So, once again you’re thinking, great, I can take R500,000 tax-free!

Well, that all depends, because the R500,000 is a lifetime, once-off amount and applies across all funds. If you’ve already used this exemption in the past, forget about using this.

Now let’s make certain that we’re all on the same page here…

Retirement fund benefits are made up of:

  • Pension funds
  • Pension Preservation funds
  • Provident funds
  • Provident Preservation funds
  • Retirement Annuity funds, and
  • Severance packages

Now generally, some of these options allow you to take everything in cash, while others only allow you one-third in cash, but that’s a discussion for another day. Let’s look at the portions taxed according to the table mentioned above. In other words, the portion taken in cash.

This is when you’re allowed to take your retirement fund, or a portion thereof, in cash:

  • Death,
  • Disability,
  • Retirement, and
  • Termination of your employment by an employer

So, how does SARS tax you?

Well, once again SARS pulls out your file, dusts it off, and drags up your dreadful past.

The following are all lumped together, and tax is calculated according to the table above:

  • The current withdrawal you’re considering
  • All retirement fund lump sum benefit accruing from October 2007
  • All retirement fund lump sum withdrawal benefits accruing from March 2009
  • All severance benefits accruing from March 2011

 Then they deduct from that sum, all the tax payable according to the tax table on:

  • All retirement fund lump sum benefits prior to this one, and accruing from October 2007
  • All retirement fund lump sum withdrawals from March 2009
  • All severance benefits prior to this one, and accruing from March 2011

Confusing, right? That’s why you should see a tax practitioner before doing any of the above. Why a tax practitioner? Because they have insight into your tax standing with SARS.

This article is getting a bit long so we’ll end it here. In our next article we’ll look at where I went wrong when doing the tax calculation, and the reason why she got out less than expected!

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