Do I qualify for a tax-free withdrawal at retirement if I’ve made a prior withdrawal?


Two advisors answer this reader’s question.

The situation: A person resigns from their job. They have a pension fund with their ex-employer, and its value is say R500 000. I believe one can take a once-off withdrawal with the first R25 000 being tax-free and the amount up to R600 000 being taxed at 18%.

If one did this, the question is, upon retirement/over age 55 (with other retirement/pension savings available) does one still qualify for the tax-free amount at this point; in other words, the first R500 000 tax-free and then normal monthly annuity thereafter, or is that now not available due to the taxed withdrawal prior to age 55/retirement?

Thanks a lot for [your question].

Let’s start off by affirming that the legal retirement age in South Africa is 55.

Why is this important to note? If you withdraw from your pension or provident fund before this age, you will be taxed according to the withdrawal benefit tax table. If you withdraw after the age of 55, you will be taxed according to the retirement and death benefit or severance tax table.

If you decide to withdraw your pension/provident fund before 55, you will be taxed according to the table below. As you correctly stated in your example, you will be taxed 18% on the R600 000 withdrawal. This means you will pay R103 500 tax on the withdrawal.

retirement savings, retirement savings withdrawal, retirement withdrawal tax table, tax

Now, as per your example, the South African Revenue Service (Sars) will calculate your taxable lump sum by adding previous withdrawals to your retirement withdrawal.

In this case, you will be taxed on a lump sum of R1 100 000 (R600 000 plus R500 000). Thus, you will pay R148 500 tax on the withdrawal.

This is the danger for persons who withdraw their funds before the age of 55, as they lose part or whole of their R500 000 tax-free portion.

Retirement tax table,

Retirement annuity tax relief is set to a maximum rate of 27.5% of the greater of your taxable income or remuneration into a retirement annuity investment. This is subject to an annual limit of R350 000. Amounts that are not claimed as a deduction in any year of assessment (as a result of the limitation) are compounded.

When the individual retires, for example, the compounded or excess contributions that did not previously rank for deduction or which were not exempted can be used to reduce the gross lump sum figure on which the tax will be calculated.

You can ask for a tax simulation from the pension/provident/retirement annuity fund before making a withdrawal. This information is readily available to you upon your request.

You also referred to tax on the annuity income. Annuity income from a living/life annuity will be taxed according to the pay-as-you-earn tax tables or your tax directive (if you have one).

If you have any questions, feel free to contact me or your financial advisor.

Enjoy your retirement!

Was this answer by Francois helpful?


Dear reader,

Thank you for your question.

To best answer your question, we will provide an explanation as to how the withdrawal tax table and retirement tax table affect the tax payable in the event of your resignation and/or your retirement.

When leaving your employer fund before age 55, you are given an option to take a cash portion from the fund, and this cash portion may be up to 100% of the fund value. The lump sum cash amount that you elect to take as a cash withdrawal is taxed according to the withdrawal tax table below, where the first R25 000 is taxed at 0%.

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

At your retirement, you may then retire from the fund, and you may take up to one-third in cash while two-thirds must be used to purchase an annuity.

At retirement, the cash portion elected is taxed at the retirement tax table below, where the first R500 000 is taxed at 0%. The income drawn from the annuity is included in your taxable income for the tax year.

However, previous withdrawals, cash commutations on retirement and severance payments affect your next cash lump sum taken at retirement.

Prior withdrawal benefits taken from retirement funds after 1 March 2009, retirement fund lump sums taken on retirement after 1 October 2007, and any severance payments received after 1 March 2011, are aggregated for the calculation of the cash lump sum taken at retirement.

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

An example 

If an individual leaves an employer fund on or after 1 March 2009 and elects to take a cash portion of R500 000, the R500 000 will be taxed according to the withdrawal tax tables. Assuming that this individual retires at a later stage from their retirement fund and elects to take R500 000 as a cash amount, this lump sum will be taxed according to the retirement tax tables. However, the prior withdrawal of R500 000 will be included in the calculation and, therefore the tax payable would be on R1 million and there should be tax payable of roughly R117 000.

Most service providers offer to run a tax directive simulation before making a final election, and the directive will indicate the tax payable to Sars should you wish to take a cash portion at retirement.

This way you would be able to know if there is any tax payable – and is advisable, since once you have made an election it is final. It is recommended that you engage with your financial advisor to help you make well-informed decisions and ensure that you are able to meet your retirement objectives while remaining as tax efficient as possible.

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