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What are the tax implications of withdrawing R700k from my pension preservation fund?

Three advisors answer this reader's question.

I turned 55 in April 2022. I left my job over 10 years ago and invested/transferred my pension to an Absa pension preservation fund. I now want to withdraw one-third which is about R700 000 and still leave the balance in the above fund. What are the tax implications? Am I entitled to the R500 000 tax-free allowance? Can I leave the balance in the above fund?

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Dear Reader,

A pension preservation fund allows for one withdrawal (partial or full) prior to retirement. The exception to this rule is if the funds were originally transferred from the Government Employees Pension Fund (GEPF), in which case specific rules will apply.

If you have not yet made a withdrawal from this fund, you will be permitted to withdraw the required R700 000, subject to tax, prior to your retirement date and leave the remaining balance in the preservation fund until you choose to retire.

Having recently turned 55 may qualify you for retirement from your preservation fund in terms of its specific fund rules, which will also allow you to access the required funds.

Retiring from your preservation fund will result in more favourable tax rates with regards to a lump sum benefit as the first R25 000 of a withdrawal benefit is taxed at 0% but at retirement, the first R500 000 of a cash lump sum is taxed at 0%. These amounts which are taxed at 0% are available once in your lifetime. See table below for comparison purposes.

There are, however, other implications that also need to be considered. Should you choose to retire from this investment, you will be able to take the one-third as a lump sum, however, the remaining two-thirds will have to be transferred tax-free for the purchase of a compulsory annuity which will pay you a taxable pension (annuity) income going forward. This pension income will be taxed at your marginal tax rate which is particularly important to consider if you will still be receiving other sources of income. A financial advisor will be able to help you navigate the various considerations when choosing between a living annuity, a life annuity, or a hybrid product for the remaining two-thirds.

In terms of the taxability of the above lump sum, several historic factors need to be taken into account. Have you received any retirement fund lump sums on retirement from 1 October 2007 or received any retirement fund withdrawal benefits from 1 March 2009? Have you ever received a severance payment from 1 March 2011? Do you have any outstanding income taxes payable to the South African Revenue Service (Sars)? These factors might impact the tax relief  you can expect. For the purposes of this discussion, I will assume that the answers to these questions are “no”.

If you opt to make use of your once-off withdrawal from your preservation fund prior to your retirement, the R700 000 will be taxed at the Sars withdrawal tax table as follows:

LUMP SUM TAX
R0 – R25 000 0%
R25 001 – R660 000 18% of any amount over R25 000
R660 001 – R990 000 R114 300 + 27% of any amount over R660 000
R990 001+ R203 400 + 36% of any amount over R990 000

Applying the above tax table to the R700 000 withdrawal, it is estimated that tax of R125 100 will be deducted and the balance of R574 900 will be paid out to your bank account.

If you opt to retire from your preservation fund, the R700 000 will be taxed at the Sars retirement tax table as follows:

LUMP SUM TAX
R0 – R500 000 0%
R500 001 – R700 000 18% of any amount over R500 000
R700 001 – R1 050 000 R36 000 + 27% of any amount over R700 000
R1 050 001 + R130 500 + 36% of any amount over R1 050 000

Applying the above tax table to the R700 000 withdrawal, it is estimated that tax of R36 000 will be deducted and the balance of R664 000 will be paid out to your bank account. The remaining two-thirds will be utilised to purchase a compulsory annuity that you have selected.

Rather than only focusing on the immediate tax implications of your decision, you should also consider the future impact that this decision can have on your financial planning. Due to the cumulative nature of retirement fund withdrawal benefits received, the choice you ultimately end up making will be relevant for any future retirement planning.

Was this answer by Tanya helpful?
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Thank you for your question. I would like to start off by distinguishing between withdrawing from a fund and retiring from a fund.

People generally choose to withdraw from retirement funds when they are under the age of 55, in need of cash, and where they have no other discretionary investments to dip into.

Withdrawing from a retirement fund is a more expensive way of accessing your capital.

When you withdraw, you have access to 100% of the money in the fund. However, when withdrawing from a preservation fund, keep in mind that you only have one opportunity for withdrawal – after which you will need to wait until age 55 to retire from the fund.

On the other hand, you can retire from a fund from age 55 onwards.

With a pension preservation fund, you can take up to one-third in cash (which is what you mentioned you are considering) which, while still subject to tax, is not taxed as heavily as a withdrawal.

Having unpacked the difference between withdrawing and retiring from a pension preservation fund, let’s have a look at the tax differences which are best explained using an example.

Assuming you have not made a previous withdrawal from your fund, you will be permitted to make a withdrawal. However, if you have made other withdrawals from other retirement funds, the withdrawal amount will be aggregated for tax purposes.

If you have never made a withdrawal before, the tax table that will apply to your current withdrawal is as follows:

Taxable income Rate of tax (R)
R1 – R25 000 0%
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

No previous withdrawals: If you have made no previous withdrawals from a retirement fund, you will be taxed as follows:

(R700 000 – R660 000) * 27% + R114 300 = R125 100

This means  you would be able to walk away with a net of tax amount of R574 900.

Previous withdrawals: This example serves to demonstrate how you will be taxed assuming you have previously made a withdrawal of R100 000 from a retirement fund. In such circumstances, your tax will be calculated as follows:

R700 000 + R100 000 = R800 000

(R800 000 – R660 000) * 27% + R114 300 = R152 100

You would also have paid tax on this R100 000 at the time of your withdrawal (if done after September 2009):

(R100 000 – R25 000) * 18% = R13 500

The R13 500 will be subtracted from R152 100, which will leave you with a tax bill of R138 600. You will have an after-tax amount of R561 400. 

Am I entitled to the R500 000 tax-free allowance?

As you can see, the R500 000 portion that is taxed at 0% is only applicable when you retire from the fund and not when you withdraw from the fund. On withdrawal, only the first R25 000 lump sum will be taxed at 0%.

Can I leave the balance in the above fund?

You mentioned that you are currently age 55 which means that you should have the option to retire from the fund. Should you retire from the fund (as opposed to withdrawing), you will be able to take out one-third of the cash which is in line with your intention. The remaining two-thirds must be used to purchase an annuity. On the other hand, if you choose to withdraw from the fund, you will be permitted to leave the remaining balance invested in the fund.

The benefit of retiring from the fund is that the applicable tax tables are more favourable:

Taxable income Rate of tax (R)
R1 – 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 R1 050 000

No previous withdrawals: This means that if this is your first lump sum from a retirement fund, your tax will be as follows:

(R700 000 – R500 000) * 18% = R36 000

You will have an after-tax amount of R664 000.

Previous withdrawals: If, for example, you have made a previous withdrawal of R100 000, your tax will be calculated as follows:

R700 000 + R100 000 = R800 000

(R800 000 – R700 000) * 27% + R36 000 = R63 000

You would also have paid tax on this R100 000 at the time of your withdrawal (if done after October 2009):

(R100 000 – R25 000) * 18% = R13 500

The R13 500 will be subtracted from R63 000, which will leave you with a tax bill of R49 500. This means you’ll have a post-tax amount of R650 500.

Since there is a major tax saving by retiring from the fund instead of withdrawing from the fund, it is important to understand what your options are with the remainder of the preservation fund.

You have the option to purchase a life annuity from an insurer, which will provide you with a fixed income for life, or you can purchase a living annuity from which you will need to draw an income of between 2.5% and 17.5% of the capital amount per year. Naturally, the lower the income drawn, the longer the investment will last, and nothing prevents you from reinvesting the 2.5% income that you receive from it.

It is important to note that the income received from such an annuity will be subject to your personal income tax rate, keeping in mind that the income might push you into a higher tax bracket. Should you retire from the fund, the income rand amount from the initial investment value (working on an amount of R1 400 000) will fall somewhere between R2 916 and R20 416 per month.

As is evident from the above, it is important to carefully consider the options available to you before making a decision on how to access the funds.

Was this answer by Devon helpful?
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Dear Reader,

Thank you for your question.

While we are not privy to all the information about your situation, we assume you are now on retirement as you only mentioned leaving your job and not that you moved to a new job.

First and foremost, we are going to address the first two questions jointly as they are related.

It is our assumption that you have never withdrawn from your preservation fund and that the investment was opened before 1 March 2021. You are allowed to make one full or partial withdrawal before your minimum retirement age which is the age of 55 years. You will be taxed based on the withdrawal lump sum tax table, which means the first R25 000 is tax-free. Please note that with this option you will be paying more in tax.

Assuming that you have previously withdrawn from another retirement fund, you can only access the balance at the minimum retirement age of 55, which you have indicated is your current age. For example, if your previous withdrawals amount to R350 000, the remaining R150 000 from the R500 000 would be tax-exempt and the rest is taxed based on the retirement lump-sum tax tables.

If you have not previously withdrawn from another retirement fund, this means the first R500 000 of any cash lump sum is paid out tax-free. In this case, the first R500 000 is tax-free, and the remaining R200 000 is taxed as per the retirement lump sum tax tables.

Can I leave the balance in the above fund?

Upon retirement and/or the withdrawal of a third, the two-thirds should be transferred to a compulsory annuity. However, we do advise our clients to invest in a living annuity where you can elect to withdraw between 2.5% and 17.5% stipulated by the law per year.

Living annuities offer the assurance that you will not outlive your capital and allow you to choose your own asset allocation. Another benefit is that you are allowed to nominate beneficiaries and, when you pass on, they will have immediate access to the funds.

It is wise of you to enquire about your options at retirement as well as the tax implications that may occur. We hope we’ve answered your question clearly and that you are able to make an informed decision regarding the withdrawal.

Was this answer by Michael helpful?
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