If you’re thinking about withdrawing some of your retirement funds to splurge on a holiday this December, beware! Recent amendments to legislation should make you think twice before taking an early withdrawal, irrespective of the reason – or the season.
Lump sums taken from a retirement fund prior to actually retiring are called ‘withdrawal benefits’ and are taxed differently to lump sums taken at retirement or death, called ‘retirement benefits’.
Since the 1st of October 2007 retirement benefits have been taxed according to a sliding scale. In terms of recent amendments to tax legislation a separate table has been introduced to calculate the tax on withdrawal benefits. In a bid to promote retirement saving, withdrawal benefits are now taxed at higher rates than retirement benefits. And to make the situation more onerous, both tables are applied on a cumulative basis. In other words, all withdrawal and retirement benefits are added together, potentially increasing the marginal rates applicable to each benefit accrued.
The implications are twofold, says Matthew de Wet of audit, tax and advisory firm Mazars Moores Rowland. “If you want to withdraw a portion of your funds before you retire, you’ll face higher tax rates than you would have faced at retirement. In addition, your withdrawal will negatively affect the tax rate applied to your future retirement benefits due to the cumulative basis of the new retirement benefit tables,” he says.
Example:
Person A:
Person B: |
Changes his employer and withdraws from Fund 1 receiving a withdrawal benefit of R600 000. Tax payable: Joins Fund 2 with a new employer and later retires receiving a retirement Benefit of R100 000. Tax payable: Total taxes paid on the R700 000 of benefits received:
Retires from Fund, receiving retirement benefit of R700 000. |
R103,950
R130,950
|
But it’s not all bad news, says de Wet. “The amendments have also brought some relief. Treasury has acknowledged the reality of job losses and financial strains facing South Africans.” So lump sums received by (or accrued to) a person on or after 1st of March this year (2009) as a result of retrenchment or any other involuntary reason for losing your job are being taxed more leniently. This means that when you wind up your 2010 tax affairs at the end of February next year, any such lump sum benefits you received in that year of assessment will be taxed according to the retirement benefit tables as opposed to the withdrawal benefit tables.