A Fin24 reader wanting to withdraw from her pension fund was advised that she would have to pay R2 million in tax. Looking to find different, cheaper tax options, she writes:
I am 57 years old, and my pension fund is worth R5 million. I want to withdraw, but was told that I would have to pay R2 million in taxes. Is there a better option so that I pay less tax?
Rita Cool, certified financial planner at Alexander Forbes, responds:
The easiest way to save tax is not to take the full amount in cash, but that will depend on why you wanted or needed to take the money.
At age 57 you can retire or withdraw from a fund, unless the fund rules or employer require one or the other.
On withdrawal you only get R25 000 tax-free once-off over your whole career and you can take all the money in cash. At retirement you can get up to R500 000 tax-free, once-off over all your retirement investment products, but you can’t necessarily get all the cash. From a pension fund you can only get up to one third in cash at retirement. There are new rules on provident funds, mostly for those who were under 55 years on 1 March 2021.
At retirement you also have to get a PAYE taxable income from the amount you didn’t take in cash. On both retirement and withdrawal, any cash taken above the tax free amount is taxed at higher and higher tax rates the more cash you take - up to 36%. The tax rates are not linked to how much you earn and are not reduced for those who earn less.
If you are withdrawing and if you don’t need all of the money, take only the cash you need, pay tax on that portion and preserve the rest, tax-free in a preservation fund, retirement annuity or in your new employer’s fund. Each of these options have pros and cons as to costs and accessibility.
If you have never taken any cash from a retirement product or been retrenched, the withdrawal tax on R5 million should be R1 647 000. If you have to pay R2 million, it means that you have already received retirement cash before and have used up your tax-free amount and some of your cheaper tax brackets.
Speak to a financial advisor to discuss all the options available as there are many issues to take into account. Simply trying to save tax on the lump sum might have unintended consequences on your overall financial situation, like increased income tax if you retire and start to earn retirement income while you are still working.
Questions may be edited for brevity and clarity.
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