By: Hannah Myburgh
If you’ve been contributing to your employer’s pension fund and are contemplating retirement, you may be curious as to what the process of formal retirement entails. In this article, we break down the steps involved and the decisions that need to be made. Let’s assume that you currently have R6 000 000 invested in your company’s pension fund and are considering formal retirement within the next few months. Here’s what the process entails.
When you retire from your pension fund, you can take up to one-third of the fund value in cash, although keep in mind that there are tax implications for doing so. For this exercise, we have assumed that you will take a one-third cash commutation and that you will use the remaining two-thirds to purchase an annuity.
The R2 million lump sum that is to be commuted to cash will be taxed as per the retirement tax tables, keeping in mind that the first R550 000 will be taxed at 0%. However, any previous withdrawals that you have made from retirement funds will affect this and it is advisable to request a tax simulation to establish your tax standing at the time of retirement. The remaining balance of R4 million must be used to purchase an annuity, bearing in mind that there is no tax payable on this transaction.
Once you have decided to retire, your financial advisor should contact the retirement fund service provider and request a tax simulation based on your tentative decision, keeping in mind that this can take a couple of days. The tax simulation will reflect the tax you will be liable for should you take your R2 million cash commutation. If you are satisfied, you will then complete an application form to formally retire from your fund which includes information on how you will be retiring from it.
You will also need to complete an application for the annuity product you intend to purchase with the remaining R4 million. Once all documentation has been submitted, your service provider will request a tax clearance certificate from Sars which is normally issued within a couple of days. Once received, your retirement fund service provider will deduct the tax owing and pay it over to Sars, transfer the remaining funds to your chosen annuity provider, and pay the cash portion directly into your bank account.
Note that if your employer contributes to your retirement fund, their final contribution only needs to be paid by the 7th day of the following month in which you retire. Once the contribution reflects, which could take a couple of days, the fund can process the retirement instruction which can take up to six weeks to process.
When calculating the tax payable on your R2 million commutation, the following tax tables will apply:
| Taxable Income (R) | Rate of tax (R) |
| 1 – 550 000 | 0% of taxable income |
| 550 001 – 770 000 | 18% of taxable income above 550 000 |
| 770 001 – 1 155 000 | 39 600 + 27% of taxable income above 770 000 |
| 1 155 001 and above | 143 550 + 36% of taxable income above 1 155 000 |
Kindly note that the tax table applicable to this calculation is subject to change at the start of every tax year. In preparing the calculation below, we have assumed that you have not made any previous withdrawals from a retirement fund.
Taking these assumptions into account, tax on your one-third cash commutation would be calculated as follows:
R 6 000 000 / 3 = R 2 000 000
Therefore, the R2 000 000 will fall in the last tax bracket:
(R2 000 000 – R1 155 000) * 36% + R143 550 = R447 750
The retirement fund will pay 447 750 directly to SARS and transfer the after-tax amount of R1 552 250 (R2 000 000 – R447 750) into your bank account.
The remaining two-thirds of the retirement fund of R4 000 000 will be transferred tax-free to your chosen annuity provider.
So, if you’re planning to formally retire from your pension fund, consider the following:
Insist on a tax simulation on the amount you think you want to take as a cash commutation. You may have forgotten a previous withdrawal made from a retirement fund which could significantly impact your tax bill.
The process of formal retirement from a fund can take several weeks to complete so ensure that you have sufficient funds in your bank account to see you through this period.
Don’t rush your retirement decisions as many of them are permanent. Ideally, start working with an independent advisor a couple of years before your planned retirement so that you can make well-considered, strategic decisions at formal retirement.
* Myburgh is a financial planner at Crue Invest.
PERSONAL FINANCE