When can I withdraw R500k from my provident fund tax-free?

Two advisors answer this reader's question.

I’m trying to find out when I can withdraw R500 000 from my provident fund tax-free. I may resign and head to Australia soon and so my provident fund will go into a preservation fund. I’ll be 55 very soon and want to know whether I can withdraw money from the preservation fund tax-free when I turn 55? I won’t be financially emigrating.

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Dear reader,

Thank you for submitting your question.

There are certain rules in South Africa pertaining to retirement fund withdrawals and what is allowed and when.

As from October 1 2007, the taxable portion of a lump sum from a pension, provident, preservation or retirement annuity fund upon retirement or death, is the lump sum less the allowed R500 000 tax-free portion less any contributions not previously allowed as a tax deduction plus the aggregated value of all lump sums previously received. As from March 1 2011, certain severance benefits are also taxed in accordance with the tax table.

An investor can only access the R500 000 tax-free portion upon retirement (from age 55 onwards). In your case that would mean your only option to gain access to the R500 000 tax-free is to transfer your withdrawal benefit from your employer provident fund to a preservation fund and then retire from there once you reach age 55, as you correctly pointed out.

When you retire, the remaining balance (after deduction of the cash lump sum) has to be invested in an income-producing investment, such as a living or guaranteed annuity.

On retirement, there are a number of rules that will apply.

When retiring from a pension fund, pension preservation fund or retirement annuity fund, you can only access a maximum of one-third as a cash lump sum. In other words, your fund value at retirement needs to be greater than R1 500 000. If less, you won’t be able to take the full R500 000 tax-free allowance as a cash lump sum.

You are, however, allowed to take up to one-third cash lump sum at retirement from all your other retirement funds as well, if you have any, but only the first R500 000 is tax-free.

However, the rules that apply to the retirement from provident funds and preservation provident funds differ slightly. Prior to the implementation of the annuitisation of provident funds on March 1 2021, one was allowed to commute your full retirement benefit from a provident/preservation provident fund as a cash lump sum, subject to taxation. But the annuitisation of provident funds meant that as from March 1 2021 provident and preservation provident funds are to be treated in the same manner as pension, pension preservation and retirement annuity funds in that only one-third maximum can be commuted as a cash lump sum at retirement, and the remaining two-thirds must be used to purchase a pension.

However, the following provisions apply, which are relevant to your scenario:

  • If you were 55 years and over on March 1 2021, then the annuitisation of provident funds does not affect you, and you will still be allowed to commute your full retirement benefit as a cash lump sum.
  • If you were younger than 55 years on March 1 2021, then your retirement benefit which accumulated before and until March 1 2021 plus interest accrued thereon up until retirement, may be fully commuted as a cash lump sum. This is referred to as the ‘vesting portion’. However, benefits accumulated after March 1 2021 plus accrued interest thereon is subject to a maximum one-third cash withdrawal and the remaining two-thirds must be used to purchase a pension. This is referred to as the ‘non-vesting portion’. If the non-vesting portion is less than R247 500 at retirement, you are allowed to commute the full amount as a cash lump sum.

The tax-free portion of a cash lump sum is subject to the deduction of any tax-free amounts previously taken throughout your career – this will effectively reduce the tax-free amount you qualify for, as mentioned above. If you are unsure whether you have previously received any lump sums, you can contact the South African Revenue Service (Sars) or log into your eFiling profile to ascertain this. We have encountered numerous situations where investors forgot about smaller amounts taken in cash during the earlier years of their careers, where they resigned and moved to other employment.

Depending on the administrator of your provident fund, you can also request that they run a simulation of different scenarios on withdrawals and the associated tax implications at both retirement and/or resignation.

As reference, I have included the tax tables which are applied to a resignation cash lump sum and a retirement cash lump sum.

In both instances, the withdrawal amount is subject to tax at the provided rates, less any tax-free allowances on previous lump sums, which are taken into account in accordance with the current tables, regardless of the tax actually paid on that lump sum (whenever it occurred).

At retirement:

At resignation or once-off withdrawal before retirement:

As from March 1 2009, the taxable portion of a pre-retirement lump sum from a pension or provident fund is the amount withdrawn less any transfer to a new fund plus the value of all withdrawal lump sums previously received.

 

Also note that an assessed loss cannot be offset against the tax payable on retirement funds.

It is best to speak to a qualified advisor who can assist you in making an informed decision.

Was this answer by Suzean helpful?
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Thank you for your question. Provident funds, which are governed by the Pension Funds Act, are specifically designed for retirement savings. They are only available to you if your employer runs one. When leaving your employer and therefore leaving the fund, you can either cash in the savings subject to your withdrawal tax table or move the funds into a personal retirement annuity (RA), preservation fund or another employer’s fund without paying tax. A combination of the two is also possible. If you are leaving the fund and over the age of 55, retiring from the fund is also possible.

The R500 000 tax-free cash “withdrawal” that you have referred to is only available at the time that you retire from the fund. The earliest that you are usually able to retire from the fund is at the age of 55.

The other times that you are able to retire from the fund are when you stop working due to ill health or when you financially emigrate (which you mentioned is not the case in your situation).

It is important to note that as of March 1 2021, there was a harmonisation between pension and provident funds where provident fund contributions after this date will have to be treated the same as a pension fund and members will not be able to access 100% of their funds when they retire and will be restricted to the one-third withdrawal rule.

So, while it is safe to assume that you will be able to access nearly 100% of your funds when you retire from your provident fund, any contributions and growth on those contributions after March 1 2021 (the non-vested portion) will be subject to a maximum cash commutation of one-third and the remaining two-thirds will need to be used to purchase a life or living annuity. If the non-vested amount is less than R247 500, you will be able cash in the entire amount subject to the relevant tax table.

The reason we mention this is that should you retire from the fund and be forced to take out a life or living annuity due to the non-vested value of the provident fund being over R247 500, you will need to retain a South African bank account in order to receive the benefits from the life or living annuity.

Should you preserve your funds when you resign and then look to retire from the preservation fund, the above information will still apply – in other words, the vested and non-vested rights will pull through into your preservation fund.

When retiring from a compulsory fund such as an RA (retirement annuity), pension, provident or preservation fund, the cash commutation you take from all funds you retire from is taxed as per the following tax table:

 Taxable income (R) ​Rate of tax (R)
1 – 500 000​ ​0% of taxable income​
​500 001 – 700 000​ ​18% of taxable income above 500 000
700 001 – 1 050 000​ ​​36 000 + 27% of taxable income above 700 000
​1 050 001 and above ​130 500 + 36% of taxable income above 1 050 000

Withdrawals from retirement funds like pension or provident funds, which are often made before members reach age 55 such as in the case of resignation are taxed on a different set of tax tables as seen below:

 Taxable income (R)​ Rate of tax (R)​
1 – 25 000​ ​0%
​25 001 – 660 000 ​18% of taxable income above 25 000
​660 001 – 990 000 ​114 300 + 27% of taxable income above 660 000
​990 001 and above ​​203 400 + 36% of taxable income above 990 000

However, although you have the tax-free portion of R500 000 at retirement, keep in mind that if you have withdrawn from any other pension or provident funds during your lifetime, these benefits – along with your retirement cash benefit – will be aggregated and taxed as a lump sum. As such, a tax simulation is advisable before making your final decision as this will show the estimated tax you will pay on a withdrawal or retirement subject to previous withdrawals.

A simple example of this can be seen below:

Member XYZ withdrew R36 000 from a provident fund in 2012 when they resigned and moved the rest of their funds into their new employer’s fund.

The tax table is as follows and shows how much tax they will pay on the R36 000 withdrawal:

2023 tax year (March 1 2022 – February 28 2023) (no changes from last year)

 Taxable income (R)​ Rate of tax (R)​
1 – 25 000​ ​0%
​25 001 – 660 000 ​18% of taxable income above 25 000
​660 001 – 990 000 ​114 300 + 27% of taxable income above 660 000
​990 001 and above ​​203 400 + 36% of taxable income above 990 000

In this case, the tax was as follows:

(R36 000 – R25 000) * 18% = R 1 980.

In 2022, Member XYZ is now ready to retire and has R2 000 000 saved in their provident fund with their new employer. They would like to know how much tax they will pay if they retire from the fund and take what they think is the R500 000 tax-free amount.

Should they take the full R500 000 now, the tax will be calculated as follows:

  • R 36 000 (previous withdrawal)
  • R 500 000 (current withdrawal)
  • R 536 000 (full cash portions)

The retirement tax tables that will apply:

2023 tax year (March 1 2022 – February 28 2023) (no changes from last year)

 Taxable income (R) ​Rate of tax (R)
1 – 500 000​ ​0% of taxable income​
​500 001 – 700 000​ ​18% of taxable income above 500 000
700 001 – 1 050 000​ ​​36 000 + 27% of taxable income above 700 000
​1 050 001 and above ​130 500 + 36% of taxable income above 1 050 000

(R536 000 – R500 000) * 18% = R6 480

The previous tax amount of R 1 980 will be subtracted from this, which will leave Member XYZ with a tax bill of R4 500.

This example serves to demonstrate the importance to have a Sars tax simulation done before withdrawing the cash so as to establish as far as possible how much you’ve withdrawn from funds before. The financial planner who set up your provident preservation fund will be able to contact the relevant asset manager to assist with this.

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