At TaxTim, we receive many questions from taxpayers about retirement funds and tax.

One of the biggest benefits of contributing towards a retirement fund is the tax break. Saving for your retirement means that you can deduct your monthly pension and/or provident contributions from your taxable income which results in a lower deduction of PAYE each month. Alternatively, if you contribute towards a retirement fund in your personal capacity (and not via your employer) you can deduct your annual retirement annuity (RA) contribution from your taxable income on your tax return.

The main difference between a pension or  provident fund and an RA is that a member can withdraw from a pension or provident Fund at any stage, while members of an RA can’t cash out before the age of 55 The only exception is if you’re formally emigrating from South Africa or the amount in the fund is less than R7 000. 

Here are some of the burning questions that we’ve have received from taxpayers about retirement funds:  

1. I have a provident fund that should be worth around R1m in seven years' time. Considering that I have already paid tax on my salary during my working life, will this amount also be taxed?

Tax is payable on all lump sums withdrawn from a retirement fund. To calculate the tax payable on a R1m withdrawal, take a look at our Lump sum calculator. If you withdraw before you’re meant to retire and not as a result of retrenchment, there should be a tax-free portion of R25 000. However, if you withdraw upon the retirement age of 55 and you have not yet cashed out any prior lump sums, then the first R500 000 of your lump sum will be exempt from tax.

2. Does the 27.5% contribution limit apply for my lifetime and if yes, how does this work?

You can contribute up to 27.5% of your taxable income towards a retirement fund (i.e. pension, provident or retirement annuity) annually, although this is limited to an amount of R350 000. This means that if you contributed to the maximum of 27.5% of taxable income, and this amount exceeded R350 000, then your contribution will be limited to R350 000 and the remaining amount will be carried over to the next tax year.

3. How much tax do you pay on voluntary retrenchment packages?

All severance benefits (‘voluntary’ or ‘involuntary’) are treated like lump sums, paid to you upon retirement. The first R500 000 is tax-free and the balance is taxed at rates of 18%, 27% and 36% depending on how much the severance package is worth. Check out our handy lump sum calculator to determine which rate applies to your package.

4. How many retirement annuities can I invest in?

You can invest in as many retirement annuities as you like. However, keep in mind that when working out your tax deduction, you need to add up contributions made into all funds for the whole year and then calculate your contribution limit (for instance, the maximum of 27.5% of taxable income, capped at R350 000). You must, therefore, look at the aggregate of all RA contributions when doing your calculations.

5. When can I access the funds in my retirement annuity?

An investor can only access the funds in their RA from the age of 55 and beyond. There are two exceptional cases where the funds can be accessed earlier. The first case would be formal emigration from South Africa and the second case would be early retirement due to ill-health.

6. Can I stop contributing to my RA?

You can stop contributing, but there may be penalties depending on the type of policy. Unit trust RA’s won’t incur penalties. Insurance RA’s, on the other hand, have less flexibility and you may be expected to pay penalty fees if you stop contributing. With all types of RA’s, it’s important to bear in mind that the amount that you’ve contributed will not be paid out until you’ve reached the retirement age of 55.

7. What happens to my RA when I retire?

When you retire, you have the option to withdraw one-third of the investment in cash. The remaining two-thirds must be used to purchase an annuity (i.e. pension income) for your retirement. If you do not wish to make a lump-sum withdrawal, you can choose to purchase an annuity with the full amount. Any cash lump sum taken from an RA at retirement is taxed, according to the special retirement fund lump sum benefit table. If your investment is less than R247 500, you should have the option to draw the entire amount.

8. Can I transfer my pension from my current employer to my new employer?

Yes, you can, although there may be some extra paperwork involved. SARS will need to be notified of the transfer, and if your former employer invests in a different pension fund from your new employer, your lump sum will have to be transferred from the one fund to the other.

9. I already contributed 27.5% of my taxable income towards the pension fund at work. Can I contribute to a retirement annuity in order to receive an additional tax deduction this year?

Unfortunately, to get a tax deduction you are not able to contribute more than 27,5% of your taxable income towards retirement funds in a tax year. If you’ve already contributed the 27,5% via your employer, then any additional amount contributed won’t be allowed as a tax deduction this year but will be carried over and be tax deductible in the following tax year.