YOUR MONEY: Can I avoid tax backlash on retirement lump sums?

Question:

I have two retirement savings — a preservation fund from a previous job that allows me to retire at 50 and a retirement annuity with a financial institution that allows me to retire at 55 — and my question is about the withdrawal of lump sums.

Assume that the value of each fund is R2m, and at the age of 50 I retire from the preservation fund and take one-third in cash (R666,666.66). The first R500,000 is tax free and I will pay tax on the rest.

Five years later, I decide to retire from the second fund. Can I take one-third in cash on this as well? And if the retirement tax tables have changed by then and the tax-free amount is, say, R600,000, does this mean another R100,000 is tax free from the one-third withdrawal?

— Sanjay 

Answer: 

Changes to the legislation governing retirement fund withdrawals became effective on March 1 2021, and one-third of any type of retirement vehicle can be withdrawn at retirement.

However, 100% of funds invested in a provident fund before that date can still be accessed. It is also important to remember the retirement lump sum scale increased to R550,000 in this year’s budget.

Withdrawals from retirement funds are viewed in aggregate. So, while you can exercise a choice on the withdrawal amount (subject to the maximum allowed) each time you retire from a specific fund, the tax table is applied to the aggregate of all lump sums previously accessed in addition to the current lump sum.

For this reason, we do not recommend taking another lump sum as you will be taxed quite heavily on the proceeds. Should the tax table be amended again and you have not used your entire tax-free component, you might benefit from the difference at that stage.

Also bear in mind that any tax owed to the South African Revenue Service, as well as previously disallowed contributions, can further affect the tax-free amount available.

If you have ever been retrenched and received a severance package, this will also deplete the tax-free component. A severance package is taxed according to the retirement tax scale.

My recommendation is to withdraw only the tax-free component as unwanted tax implications will deplete your retirement funds unnecessarily. You can then start earning a monthly income from the investment.

— Elke Brink, wealth adviser at PSG Wealth R21

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