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:
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)