How are lump sums taxed at retirement?
All lump-sum withdrawals from tax-incentivised savings are taxed on the same basis, less any tax on the previous lump sums
By Wouter Fourie
CEO of Ascor® Independent Wealth Managers and co-author of The Ultimate guide to Retirement in South Africa
As of October 1, 2007, the taxable part of a lump sum from a pension, provident, or retirement annuity fund at retirement or death is the lump sum minus any contributions that haven’t been allowed as a tax deduction, plus the taxable part of all previous lump sums. As of March 1, 2011, some lump-sum severance payments are also taxed according to the table below.
All lump-sum withdrawals from tax-incentivised savings (pension, provident and retirement annuities) are taxed on the same basis, less any tax on the previous lump sums, which is calculated in accordance with this table regardless of the tax paid on that lump sum:
Taxable portion of the lump sum |
Rates of tax |
R1 − R550 000 |
Nil |
R550 001 − R770 000 |
18% of the amount over R550 000 |
R770 001 − R1 155 000 |
R39 600 plus 27% of the amount over R770 000 |
R1 155 001 and above |
R143 550 plus 36% of the amount over R1 155 000 |
All the brackets are subject to the condition that you may not withdraw more than a one-third lump-sum commutation benefit from a pension fund, including a retirement annuity fund and a pension preservation fund, unless the amount available to purchase a pension is less than R247 500.
The tax-free amounts are cumulative. In other words, say you are 55 and have a retirement annuity with an accrued value of R300 000. You take one-third as a lump sum – namely, R100 000. You have not taken any previous lump-sum retirement benefits. The full R100 000 is tax-free in your hands. In five years, at age 60, you intend to retire from your pension fund. Your retirement capital is R3 million, of which you wish to commute the full permissible one-third: R1 million. The calculation of tax is shown in the following table.
Step 1 |
Start with the lump sum |
R1 000 000 |
|
Step 2 |
Add up earlier benefits Withdrawal RetirementSeverance Subtotal |
R100 00000 |
R100 000 |
Step 3 |
Add the lump sum and the earlier benefits |
R1 100 000 |
|
Step 4 |
Tax per above table on R1 100 000 (total) ((R1 100 000 − R770 000) × 27%) + R39 600. |
R128 700 |
|
Step 5 |
Tax per table on total, excluding the current lump sum, i.e. tax on R100 000 (regardless of tax actually paid at the time that the earlier benefits were received) |
Nil |
|
Step 6 |
Tax on current lump sum is R128 700 − nil |
R128 700 |
If you have already claimed a tax-free amount against a lump sum under the previous complex lump-sum taxation regime, you do not qualify for the new regime. If you have not reached the full amount under the previous regime, you will be able to claim that difference under the old regime.
Life insurance endowment policy
The simple rule is that if you do not qualify for a tax deduction when you contribute to an investment, then the amount available when the policy pays out will not be subject to taxation. Any lump-sum benefit paid by a life insurance endowment policy will not be subject to further taxation when paid out.
Endowments are complicated and have a minimum investment period of five years, during which time they are subject to taxation within the investment (known as the five-fund approach), and the tax is paid on your behalf. The amount available after the five years will be tax-free at one’s date of retirement.
For up-to-date retirement information, consider purchasing the 2023 edition of the Ultimate Guide to Retirement in South Africa- Third Edition – authored by Bruce Cameron and Wouter Fourie.
This article first appeared on moneyweb.co.za at https://www.moneyweb.co.za/financial-advisor-views/how-are-lump-sums-taxed-at-retirement/
Read more about Ascor® Retirement Planning Services
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