Incentives to keep your retirement money invested

2014-03-02 14:00

How government has reformed the way you’re taxed when withdrawing retirement funds

In line with retirement reform proposals over the past few years, the 2014/15 budget includes changes to the way your withdrawals from your retirement funds are taxed.

These changes are intended to encourage you to save for retirement and to preserve your savings throughout your working life.

In his budget speech this week, Finance Minister Pravin Gordhan said: “We recognise that households must be encouraged to invest in their future, including investment in homes and saving for retirement.”

The tax you pay when you withdraw money from your retirement fund prior to retirement, as well as when you retire, has been revised so that you can withdraw larger tax-free amounts.

This is the first time the preretirement tax withdrawal structure has changed since it was introduced in 2007. The tax you pay on a lump sum withdrawal at retirement was last changed in 2011.

With effect from March 1 this year, if you change jobs and withdraw a lump sum from your retirement fund, the first R25?000 is now tax-free. But the tax you pay on subsequent withdrawals has now been increased to discourage you from accessing your retirement savings.

You will pay 18% tax on withdrawals between R25?000 and R660?000. The tax on withdrawals between R660?000 and R990?000 has increased to R114?300 plus 27% of your taxable income above R660?000.

Your withdrawal of more than R990?000 will be taxed at R203?400 plus 36% of your taxable income above R990?000.

When you retire, the tax-free lump sum that you can withdraw has increased from R315?000 to R500?000. The larger increase in the tax-free lump sum is intended to avoid lower-income workers having to pay tax on their lump sum withdrawals.

The tax you pay on the amounts you withdraw thereafter has also decreased:

»?Withdrawals between R500?000 and R700?000 will be taxed at 18% of your taxable income above R500?000;

» Withdrawals between R700?000 and R1.05?million will be taxed at R36?000 plus 27% of your taxable income above R700?000; and

» Withdrawals of more than R1.05?million will cost you R130?500 plus 36% of your taxable income above R1.05?million.

In addition to these measures, Gordhan announced that “further steps will be taken to make sure you have a secure income in retirement. Unnecessary costs in the system will be cut.”

To this end, an agreement has been reached with the Association of Savings and Investment SA on a way forward to reduce the level of charges for retirement savings products. Draft regulatory reforms around this will be made public shortly.

Gordhan said: “Legislation has already been passed by Parliament to improve governance over pension and provident funds, and to align the rules and tax treatment of pension and provident funds. We still seek improved coverage and preservation of retirement funds and lower costs in the system,” he said.

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