Retirement Fund Withdrawals Prior To Retirement - Intended Changes To Taxation

This communiqué will be of particular interest to people who resign from their jobs and consider taking their retirement benefits as a lump sum from their pension or provident fund prior to retirement. Currently the law in this regard is undergoing significant change and is due to take effect 1 March 2009 retrospectively.

The tax consequences of the changes envisaged by the South African Revenue Service [SARS] require your careful consideration prior to taking a cash withdrawal, as opposed to preserving your retirement benefits for actual retirement.

In the draft Taxation Laws Amendment Bill the following important changes concerning the taking of lump sums prior to retirement are:

• The tax free 'resignation benefit' upon the withdrawal from a pension or provident fund has been increased from R1 800 to R22 500;
• Between R22 500 and R300 000 a lump sum withdrawal will be taxed at 18%;
• From R300 001 to R600 000 the tax on the lump sum withdrawal will be R54 000 +27% of the amount over R300 000;
• From R600 001 and above the tax on the lump sum withdrawal will be R135 000 +38% of the amount over R600 000.

The above changes will only become effective once public comment has been worked through to ensure that no further changes will be required. So far, SARS has issued a tax directive allowing for the first R22 500 to be exempt from tax on withdrawal from a pension or provident fund. However, SARS will still tax amounts over R22 500 at average tax rates until a new directive confirming the above is issued.

SARS has confirmed that by the time that the 2010 tax year is assessed the income tax system will have been updated with the latest changes. The normal annual income assessment will thus be correct and may result in a tax refund or tax due.

Important Warning

The implication of the proposed bill is that the R22 500 will be cumulative and applies to all withdrawals over a member's lifetime. In addition, the tax-free amount plus all withdrawal lump-sums taken will reduce the R300 000 tax-free amount at retirement. Government's intention is clear and is aimed at encouraging you to preserve your retirement benefits until actual retirement date. The proposed changes could be seen as a type of double taxation by government and a means of discouraging the early withdrawal of Retirement Funds.

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