In our previous blog article titled ‘Retirement funds and tax’, we looked at tax implications while saving for retirement and the recent changes in legislation that allow you to save up to 27.5% of your taxable income when making retirement contributions.

Retirement structure is based on three legs, namely exempt, exempt, and taxed. While saving for your retirement you are on the first ‘exempt’ leg where, as described above, you can deduct any retirement contributions being paid into a tax-incentivised retirement product from your taxable income – up to a certain limit.

While your investment grows, the second ‘exempt’ leg frees you from paying Capital Gains Tax, dividends withholding tax or income tax on the growth.

However, when you elect to retire, you enter the third leg which is ‘taxed’. This article will explain how tax is applied to retirement vehicles such as pension funds, pension preservation funds and/or retirement annuities.

Tax upon retirement

If you have been contributing to a pension fund, pension preservation fund or retirement fund, you are entitled to make a lump sum withdrawal on retirement.

The maximum amount that you are allowed to withdraw is equal to one-third of the retirement interest in your fund. If the total value of your fund is less than R247 500, then you are permitted to withdraw the full retirement interest amount as a lump sum.

Any lump sum that is withdrawn is subject to taxation:

Taxable income from lump sum benefits Rates of tax
0 – 500 000 0% of taxable income
500 001 – 700 000 18% of taxable income above 500 000
700 001 – 1 050 000 36 000 + 27% of taxable income above 700 000
1 050 001 and above 130 500 + 36% of taxable income above 1 050 000

After a one-third lump sum withdrawal, the remaining two-thirds of retirement interest is received by way of regular pension (annuity). This would be in the form of a monthly amount that you received from the annuity. If this monthly amount exceeds the tax threshold, you are liable to pay tax on the amount that is over the threshold limits which are:

For the 1 March 2017 to 28 February 2018 year of assessment for the tax season starting during 2018:
o Person below 65 – R75 750 per annum
o Person 65 and above but not yet 75 – R117 300
Person 75 and above – R131 150.

Retirement tax breaks

Despite being liable for tax on retirement, there are still tax breaks which you can enjoy as a pensioner:

  • At retirement, you can withdraw up to R500 000 tax-free from your retirement savings
  • While income from a retirement annuity is charged under income tax, the marginal tax rate that you are charged by SARS is usually lower than the rate you are charged while working.
  • Any growth in your living annuity portfolio retirement is free from income tax, dividends withholding tax and Capital Gains Tax.
  • There are tax rebates that apply to you as a pensioner in addition to the primary rebate that applies to all taxpayers.
  • As a tax payer over 65, you are subject to medical tax credits which act as an additional rebate.

Should you have questions on these tax breaks or wish to consult with a knowledgeable tax consultant regarding tax and retirement, contact Dirmeik Consulting on:

Cape Town: 021 421 4444,
Johannesburg: 010 007 3026,
Durban: 031 007 0881