Resignation or dismissal benefits
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 option:
Taxation of any cash benefit
If you were a member of the Fund on or before 1 March 1998, 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.
If you joined the Fund after 1 March 1998 the following applies:
The tax-free amount in respect of resignation benefits (referred to as “withdrawal benefits” by SARS) is R27 500. However, the R27 500 is a 'once-off' cumulative value (a lifetime allowance), and once the limit of R27 500 is reached, all further resignation benefits will be taxed.
It is very important also to note that the tax-exempt resignation benefit amount of R27 500 reduces the once-off tax exempt amount of R550 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.”
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Taxable Amount
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Rate of Tax
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Up to R27 500
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0%
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R27 501 to R726 000
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18% of the taxable income exceeding R27 500
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From R726 001 to R1 089 000
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R125 730 plus 27% of the amount above R726 000
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R1 089 001 and above
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R223 740 + 36% of the amount above R1 089 000
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Taxation if you become a paid-up member
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 if you transfer to a retirement annuity
In this case no tax is payable at the time you elect to transfer your money to a retirement annuity. You will, however, pay tax on the benefit you ultimately receive.
Importantly, if you elect this option you lose the favourable tax status applicable to paragraph (a) funds as described above.
Taxation if you transfer to your new Employer Fund
In this case you need to establish three issues, namely:
- Is your new Employer's Fund a paragraph (a) Fund or not?
In this case no tax is payable at this time. You will, however, pay tax on the benefit you ultimately receive.
You will also retain the favourable tax status applicable to paragraph (a) funds as described above.
- Is your new Employer's Fund NOT a paragraph (a) Pension Fund?
No tax is payable at this time - you will, however, pay tax on the benefit you ultimately receive.
Importantly you lose the favourable tax status applicable to paragraph (a) funds as described above.
- Is your new Employer's Fund a paragraph (a) Provident Fund?
In this case you pay tax immediately at your marginal tax rate of 2/3rds on your benefit. It is a relatively penal tax position.
You will retain the favourable tax status applicable to paragraph (a) funds as described above.
- Is your new Employer's Fund a pension or provident fund?
In this case you are deemed to have received a cash benefit equal to your own contribution plus the investment return thereon at the time of your transfer. This deemed amount will be taxed in the same way as a cash benefit (described above) and the balance of the benefit will be transferred without attracting further tax to your new Employer's Provident Fund.
You will be subject to tax when you ultimately receive your benefit from your new Employer's Provident Fund and you lose the favourable tax status applicable to paragraph (a) funds as described above.
Taxation if you transfer to a Preservation Fund
The tax treatment depends on whether the Preservation Fund is a pension or provident fund.
- Preservation Fund is a Pension Fund. No tax is payable on transfer.
- Preservation Fund is a Provident Fund In this case you are deemed to have received a cash benefit equal to your own contribution plus the investment return thereon at the time of your transfer. This deemed amount will be taxed in the same way as a cash benefit (described above) and the balance of the benefit will be transferred without attracting further tax to the Preservation Fund.
You will be subject to tax when you ultimately receive your benefit from the Preservation Provident Fund and you lose the favourable tax status applicable to paragraph (a) funds as described above.
Benefits paid to a former spouse in terms of a Divorce Order
This is a complex subject and we are not able to cover all the details here. However, our current understanding of the tax legislation is that, if you get divorced and the divorce order (made after March 2009) stipulates that a portion of your “pension interest” in the Fund must be paid to your ex-spouse, any tax that the Fund is required to pay when executing this order will be deducted from the portion paid to your ex-spouse – i.e. the tax will be for your ex-spouse’s account and not for your account. The tax rates applicable will be the same as the tax rates in respect of a cash resignation benefit, as set out above. In negotiating the divorce settlement, however, you and your spouse are strongly encouraged to take specialist advice (including tax advice) on the implications of “pension splitting”, as there have been several changes in the law relating to this and we cannot be certain that the law will not be changed again.