Tax Consequences of Pension/Provident fund withdrawals at resignation

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

  • Retirement, in normal circumstances, is allowed at the age of 55 or older
  • Pre-retirement, in normal circumstances, is before the age of 55

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:

Taxable 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
Taxable 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:

  1. Receive a cash lump sum
  2. Transfer the pension benefit to an approved Preservation fund (Pension Preservation of Provident Preservation) or Retirement annuity.
  3. Choose a combination of the two options (Excl. GEPF)

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