The value of Time and Money
December 11, 2017
Investment vehicles and Taxation
April 26, 2018
Tax Consequences of Pension/Provident fund withdrawals at resignation
Most of us will experience the process of resigning from an employer at some stage of our lives and, if you are lucky enough to receive a pension, you will be left with an important choice to make at that point.
I would like to share, in simple terms, the different tax implications when someone opts to take a 100% cash withdrawal at the point of resignation (before retirement age) or transfer their Pension fund to an approved Preservation Fund.
To understand the tax implication, there are three important aspects we need to understand:
- The difference between Pre-Retirement and Retirement
- Pre-retirement, in normal circumstances, is before the age of 55
- Retirement, in normal circumstances, is allowed at the age of 55 or older
- The difference between how Lump Sum or Pension Benefits will be taxed pre-retirement (Withdrawal Benefits Table)
and at retirement (Retirement Benefits Table), please see below:
Withdrawal Benefits TableTaxable Lump Sum Rate of Tax 0 – R25 000 0% of taxable income R25 001 – R660 000 18% of taxable income above R25 000 R660 001 – R990 000 R114 300 + 27% of taxable income above R660 000 R990 001 and above R203 400 + 36% of taxable income above R990 000
Retirement Benefit TableTaxable Lump Sum Rate of Tax 0 – R500 000 0% of taxable income R500 001 – R700 000 18% of taxable income above R500 000 R700 001 – R1 050 000 R36 000 + 27% of taxable income above R700 000 R1 050 001 and above R130 500+ 36% of taxable income above R1050 000 By simply looking at these tables, you will already have noticed the difference between the portions taxed at 0%:
- R0 – R25 000 – Withdrawal Benefits Table
- R0 – R500 000 – Retirement Benefits Table
- The options available at resignation to the Taxpayer:
- Receive a cash lump sum
- Transfer the pension benefit to an approved Preservation fund (Pension Preservation of Provident Preservation) or Retirement annuity.
- Choose a combination of the two options (Excl. GEPF)
For simplicity, I will only discuss the difference between options A & B, as the basic calculation will work the same.
Let’s look at two examples in more detail:
Example 1:
The taxpayer chooses to receive a cash lump sum at resignation:
Mr Botha, aged 50, decides to resign from his current employer and selects the option of receiving a cash lump sum. His current pension fund benefit is R400 000.
| Using the Withdrawal Benefit Table: | |
|---|---|
| Withdrawal Benefit | R400 000 |
| Tax deduction: | R0 |
| Tax implication | (R67 500) |
| Amount received by Mr Botha | R332 500 |
Five years later, at the age of 55, Mr Botha decides to retire, and will also retire from his new employer’s pension fund, valued at R1 500 000. Mr Botha decides to take a one-third cash withdrawal (maximum allowed), and transfer the remaining two-thirds to a compulsory annuity (The transfer will be taxed at 0%).
| Using the Retirement Benefit Table: | |
|---|---|
| Current Retirement Benefit | R500 000 (one-third) |
| Member contributions that | |
| did not rank for deductions | (R 0) |
| Previous benefit received | R400 000 |
| Aggregate of benefits | R900 000 |
| Tax implication | R90 000 |
| Tax deductible for previous | |
| Withdrawal using the Same Table | R0* |
| Amount received | R410 000 |
R1 000 000 (two-thirds) will be transferred to a compulsory annuity, to
provide the client with a yearly/monthly income.
Note: The R400 000 previous withdrawal falls below the R500 000 taxed
at 0%, using the Retirement Benefits table. He does not receive a tax
deduction, because of the tax paid at resignation. He effectively only
received R100 000 taxed at 0%, at retirement.
| Total tax paid by Mr. Botha: | |
|---|---|
| At resignation | R67 500 |
| At retirement | R90 000 |
| Total | R157 500 |
| Amount transferred to a compulsory annuity | R1 000 000 |
Example 2:
The taxpayer opts to transfer the Pension Benefit at resignation:
Mr Botha, aged 50, decides to resign from his current employer and selects the option of transferring his pension benefit to an approved Pension Preservation Fund, to be preserved until retirement. His current pension fund benefit is R400 000.
| Using the Withdrawal Benefit Table: | |
|---|---|
| Withdrawal Benefit | R400 000 |
| Tax deduction: | (R400 000) |
| Tax implication | R 0 |
| Amount Transferred | R400 000 |
Five years later, at the age of 55, Mr Botha decides to retire, and will also retire from his new employer’s pension fund, valued at R1 500 000. He also decides to retire from his Pension Preservation Fund at the same time, which is now valued at R600 000. Mr Botha decides to take a onethird cash withdrawal (maximum allowed), and transfer the remaining twothirds to a compulsory annuity (The transfer will be taxed at 0%).
| Using the Retirement Benefit Table: | |
|---|---|
| Current Retirement Benefit | R700 000 (one-third of R1 500 000 + R600 000) |
| Member contributions that | |
| did not rank for deductions | (R 0) |
| Previous benefit received | R 0 |
| Aggregate of benefits | R700 000 |
| Tax implication | R36 000 |
| Amount received | R664 000 |
R1 400 000 (two-thirds) will be transferred to a compulsory annuity, to provide the client with a yearly/monthly income.
| Total tax paid by Mr. Botha: | |
|---|---|
| At resignation | R0 |
| At retirement | R36 000 |
| Total | R36 000 |
| Amount transferred to a compulsory annuity | R1 400 000 |
Obvious Conclusion:
As tempting as it may be to choose the cash benefit at resignation, you will receive the following benefits, when you opt to transfer the Pension Benefit to an approved Preservation fund:
-
- No tax implications at resignation.
- The Pension Benefit remains in a tax efficient structure when transferred to an approved Preservation fund – Inside a Retirement fund, tax is payable at 0%.
- Within the Preservation fund, the client will still have the option of making a full or partial withdrawal, which means that there is some form of liquidity. This withdrawal will be taxed according the withdrawal benefit table and Example 1 will apply.
- At retirement, the amount taxed at 0% available, will be utilised at 100%.
- The amount transferred to a compulsory annuity, to provide the taxpayer with an income, will be greater in value.
- The effect of compounding interest will also play a big role.
Obviously, there are many different possible scenarios when it comes to retirement planning, which may create a wide range of different tax implications; but I hope, by using this simple example, you will better appreciate the importance of preserving Pension Benefits until retirement, whenever possible.
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
