Question:
I am 56 years old and considering taking early retirement in Oct 2014. My provident fund is worth R900 000. My questions are: 1. I owe R150 000 to the fund by way of a housing loan. How does this effect my fund? 2. How do I avoid paying the high tax to SARS? 3. When I transfer my PF to a preservation fund, will I receive a monthly payment and can I withdraw a lump sum that will be tax free? Thank you for your time as I await your response. Kind Regards Moses
Answer:
Moses,
The R150 000 housing loan will be settled before paying you out the fund balance. The loan will be viewed as a cash lump sum for tax purposes, and will be taxed accordingly.
Here's the issue: if you withdraw from the fund, your tax-free lump sum is only R25 000; you will pay tax at 18% on the balance to R150 000 in respect of the housing loan.
If you retire from the fund - which you can as you are over 55 - you tax-free lump sum is R500 000. The problem is that if you retire, you cannot then transfer any of the money to a preservation fund.
A preservation fund CANNOT not make monthly payments. You are allowed just one (full or partial withdrawal) before retirement. This withdrawal will be taxed as per the withdrawal lump sum tax table, which will be applied after first taking account of the housing loan (so no, it will not be tax free, it will be taxed at 18% up to R660 000, and at 27% for any balance up R750 000).
To receive a monthly income, you need to buy a living or guaranteed annuity, which will be taxed per the income tax table. Your annual payment will most likely fall below the tax threshold, ie you will not pay tax thereon.
So, if you want to minimise your tax, get a tax-free lump sum and get a monthly income, that is what you could do: retire from the provident fund, settle the housing loan (R150 000), take a cash lump sum of up to R350 000 tax-free and use the rest to buy an annuity. All this assumes that you have not previously withdrawn from a retirement fund, and used up your tax-free allowances.
However, without doing a proper financial needs analysis, we cannot say whether this plan would be appropriate for your circumstances.
