DEFINED BENEFIT

TAXATION OF BENEFITS

Taxation of Benefits

Disclaimer: In the event of a conflict anywhere on this website with the provisions of the Income Tax Act, the Income Tax Act will apply.

Funds such as Cape Municipal Pension Fund enjoy a special tax status in terms of the Income Tax Act as so-called paragraph (a) funds. Up to 1 March 1998, any lump sum benefit paid from a paragraph (a) fund, like the Cape Municipal Pension Fund, was tax-free.

With effect from 1 March 1998 the tax status of lump sum benefits from paragraph (a) funds changed, in effect making such benefits taxable.

However, the Income Tax Act was changed to protect "vested rights". This means that any lump sum benefit you receive from a paragraph (a) fund is only taxable in the proportion to the years of pensionable service you accrue after 1 March 1998 to the total years of pensionable service you have.

In addition, the taxable amount of any lump sum benefit will qualify for a further tax-free amount in line with what is allowed for non-paragraph (a) funds.

This section covers the tax treatment of:

Taxation of the cash lump sum payment

All retirees are eligible for a tax-free lump sum of R500 000. In addition to this tax-free amount, retirees who were members of the Fund prior to 1 March 1998, will retain their favourable tax status applicable to “paragraph A” Funds. The formula for calculating the tax-free lump sum benefit for those members who joined prior to 1 March 1998  is rather complex and will be calculated for you at the time of your retirement.

Any part of your lump sum benefit that is subject to tax, will be taxed as follows:

Taxable Amount

Rate of Tax

R0 to R500 000

0%

From R500 001 to R700 000

R0 plus 18% of taxable income exceeding R500 000

From R700 001 but not exceeding R1 050 000

R36 000 plus 27% of taxable income exceeding R700 000

Exceeding R1 050 001

R130 500 plus 36% of taxable income exceeding R1 050 000

Taxation of your pension benefit

For the 2020/2021 tax year, the following tax threshholds apply:

  • If you are under the age of 65 and your total income is less than R83 100 per annum you will pay no tax.
  • If you are aged 65 to 75 and your total income is less than R128 650 per annum, you will pay no tax.
  • If you are aged 75 and older and your total income is less than R143 850 per annum, you will pay no tax.

Taxation of the cash lump sum payment

Taxation of death benefits is treated on the same basis as taxation on retirement.

Taxation of your beneficiaries pension benefit

Your beneficiaries will pay tax in the usual way on the monthly pension they receive.

The taxation of your resignation or dismissal benefit is rather complex and depends on how you elect to receive your benefit. In this regard you have the following options:

Taxation if you become a deferred pensioner

In this case no tax is payable at the time you elect to become a deferred pensioner. You will, however, pay tax on the benefit you ultimately receive.

Importantly if you elect this option you retain the favourable tax status applicable to paragraph (a) funds as described above.

Taxation of any cash benefit

The tax-free part of the cash part of your resignation or dismissal benefit is calculated as:

The number of completed years of service you had before 1 March 1998 ÷ the total completed years of service you have on exit X your resignation or dismissal benefit + the tax free portion as shown in the table below.

The tax on the taxable portion is calculated as per the table below: 

The tax-free amount in respect of resignation benefits (referred to as “withdrawal benefits” by SARS) is R25 000.  However, the R25 000 is a 'once-off' cumulative value (a lifetime allowance), and once the limit of R25 000 is reached, all further resignation benefits will be taxed.

It is very important also to note that the tax-exempt resignation benefit amount of      R25 000 reduces the once-off tax exempt amount of R500 000 at retirement.

SARS states that “the tax on a specific retirement fund lump sum withdrawal benefit (X) is equal to–

 

“the tax determined by applying the tax table to the aggregate of that lump sum X plus all other retirement fund lump sum withdrawal benefits accruing from March 2009 and all retirement fund lump sum benefits accruing from October 2007; minus

 

“the tax determined by applying the tax table to the aggregate of all retirement fund lump sum withdrawal benefits accruing before lump sum X from March 2009 and all retirement fund lump sum benefits accruing from October 2007.

 

Taxable Amount 

Rate of Tax 

Up to R25 000

0% 

R25 000 to R660 000

18% of the taxable income exceeding R25 000

From R660 001 to R990 000

R114 300 plus 27% of the amount above R660 000

R990 001 and above

R203 400 + 36% of the amount above R990 000

PENSION FUND RULE BOOK

The registered rules of the Fund contain everything you need to know about your Fund, its Governance, Management, Investments and Benefits. The Fund is bound by the Rules of the Fund. In the event of a dispute between any information provided and the Rules of the Fund, the rules will apply.

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