Retirement Fund Rules

PRE-RETIREMENT

RA:

Can deduct the higher of:

  • 15% of taxable non-retirement funding income; or
  • R3500 less pension fund contributions
  • R1750

Any excess that the client cannot claim will increase the client’s tax free lump sum at retirement

Pension Fund:

Employer is entitled to a tax deduction for contributions made to pension, provident funds and medical aid schemes up to a maximum of 20% of the employee’s remuneration.

The employee can claim higher of:

  • R1750; or
  • 7.5% of pensionable income pa

Any excess that the employee cannot claim will increase tax free lump sum at retirement

Provident fund:

Employer is entitled to a tax deduction for contributions made to pension, provident funds and medical aid schemes up to a maximum of 20% of the employee’s remuneration.

Any contributions made by the employee will result in the increase in the tax-free lump sum at retirement, and will not qualify as a tax deduction.

 

Rules for Accessibility to Funds

Resignation

An employee has the following options:

  • Take the cash:Taxed as follows:
    • First R22500 tax free
    • R22500 to R600 000: 18%
    • R600 001 to R900 000: R103950 plus 27% exceeding R600 000
    • Above R900 000: RR184 950 + 36% above R900 000

Tax free transfer to an approved fund:

  • Tax-free transfer to an approved fund

The employee can transfer the fund to RA, preservation fund or to the new employer’s fund

  • Leave the funds in the existing retirement fund

Paid up RA’s

If an RA is made paid up and the paid up value is less than R7 000, then the member can withdraw the full amount, which will be taxed as a withdrawal. The R7 000 applies per registered fund.

Emigration

If a member of a RA emigrates he can withdraw the full value as long as:

  • RA must be paid-up before emigration
  • Approved by SARB

The withdrawal will be taxed according to the withdrawal table

Divorce

Section 37D of the Pension Fund was amended in 2007 to make provision for a non-member spouse to receive the allocated benefits as per the divorce order. The non-member has to provide the fund with a copy of the divorce order and elect how the funds are to be paid. The non-member has an option of taking cash, or transferring the funds tax-free into an approved fund. Cash will be taxed in terms of the withdrawal table in the hands of the non-member spouse. The wording of the divorce order is very important and must clearly indicate the name of the fund and amount/portion the non-member will be entitled to.

Retrenchment

First R315 000 is tax-free, whether severance benefit or retirement benefit is received by employee.

Amounts withdrawn prior to retirement will reduce the tax-free lump sum upon retirement.

 

POST-RETIREMENT

The retirement date is governed by the rules of the fund. A member of an RA can retire any time after 55, and selects the retirement age at inception of the fund. The rules of the employer funds will prescribe the retirement date.

Access to funds

RA, Pension fund and Pension Preservation fund: Up to 1/3 lump sum and the 2/3 annuity

Provident and Provident preservation fund: Member can access full amount as lump sum

Lump sum amounts will be taxed as follows:

  • R0 – R315 000 : tax-free *
  • Above R315 001 : 18%
  • Above R630 000: 27%
  • Above R945 000: 36%

* The tax free amount of R315 000 will be adjusted as follows: R315 000 + all contributions that were not allowed as a tax deduction less previous tax free portions.

Options on annuity

The member a RA, Pension fund and Pension Preservation fund has two options:

Life annuity:

Pays a guaranteed annual amount until the death of the annuitant. On death of the annuitant, the annuity ceases and the capital is lost.

Joint life annuity can be taken where the annuity is paid until the death of the last surviving party. The other option is for the annuity to decrease upon the death of the first party.

The annuity can be fixed or increased every year

Member can choose income between 2.5% and 17.5% pa, and may alter this rate on the anniversary date each year.

A beneficiary can be nominated to receive the lump sum benefit at retirement. Capital is therefore not lost upon death.

The annuitant controls the underlying investment and carries 100% of the investment risks.

Tax consequences in the event of Death

Should the member die, the benefits are taxed in terms of the retirement tax table. The benefits are taxed as though the deceased member retired from the fund the day before death. The retirement benefit will not be subject to estate duty.

If the member died prior to retirement, then the proceeds will pay to the beneficiary or dependants as determined by the Trustees of the Fund (Section 37C of the Pension Fund Act determines that the trustees have to ensure that the dependants of the member are provided for).

In Conclusion

Retirement planning is about more than the factual information of the funds, and will consist of a calculation of what the client’s needs are versus the provisions made. The financial plan will be structured to minimise any shortfall over time.

“Eddie is a good advisor that always explains everything in dept, and he always has your best interests art heart”

Edward Pitcher
Fourier Approach


“Eddie did a complete financial profile with detailed calculations of myself before recommending any financial products. His calculations were very transparent and easy to understand which made choosing the right financial tools that much easier. I recommended his to my family - something I wouldn't normally do unless I felt very comfortable with the level of expertise and integrity of the service”

Modes Cloete
CP Project Management & Training Consultants