Tax Consequences of Pension/Provident fund withdrawals at resignation
December 11, 2017
BUDGET SPEECH HIGHLIGHTS 2018
April 26, 2018
Investment vehicles and Taxation
When investors make investment decisions, whether it is to invest in a single stock, choosing an asset
manager, making asset allocations or even deciding on the term of the investment, the tax efficient
investment vehicle used is just as important.
Below, I will discuss the different investment vehicle options and the taxation of these vehicles.
I will start by explaining the different possible returns received, taxations of these returns, at what rate it will
be taxed and what exemption is available to individuals:
| Return | Taxed As | Exemption | Tax Rate |
|---|---|---|---|
| Capital Gain | Capital Gain Tax | R40,000 per year if acapital gain event occurs. It does not accumulate per year. |
40% -Inclusion rate, then multiplied by the Marginal tax rate. -Maximum effective tax rate of 18%. |
| Income | Interest |
|
Marginal tax rate |
| Rent | R0 | Marginal tax rate | |
| Dividend | R0 | 20% will be subject to Dividend Withholding Tax, meaning the Company paying the dividend will withhold the tax, and pay it on behalf of the individual to SARS. |
Below I will discuss the different vehicles, the taxation within, the term and the liquidity offered.
| Investment Vehicle | Taxation | Investment Vehicle Term |
Liquidity |
|---|---|---|---|
| Investment Plan/Unit Trust/ Share Portfolio |
|
Medium to long-term investment |
Full liquidity |
| Tax-Free Savings Account | No Taxation | Long-term | Full liquidity |
| Endowments | Taxed within the product at the following fixed rates:
|
Medium to Long-term (Five years minimum) |
One withdrawal within the first five years |
| Retirement annuities | No Taxation | Long-term | No liquidity before the age of 55* |
| Preservation Funds | No Taxation | Long-term | One withdrawal before the age of 55* |
*Taxation at withdrawal/retirement apply
Except for the Tax-Free Savings Account, which is a relatively new investment vehicle and was brought into the system to encourage individuals to start saving, and more importantly to start saving for retirement, you will notice an inverse relationship between liquidity and taxation advantages. The investment vehicle universe and the taxation within these different vehicles are much broader than explained above, and that is why it is important to always talk to an advisor, as taxation influences the returns on your investment and using the wrong investment vehicle can potentially have costly implications.
Disclaimer:
This is not to be used as financial advice, and always consult with your financial advisor before making any decision regarding pension fund withdrawals or transfers. These tax implications are subject to change.
Jacques L Marais
Client Portfolio Manager
