Question:
I have R1 055 000 in my pension fund and am planning to resign at the end of January 2014. According the fund rules, R420 000 is tax free. If I withdraw this tax-free portion and transfer the balance to a preservation fund, will this be regarded as a withdrawal or can I make one more withdrawal BEFORE THE AGE OF 55, and how will I be taxed?
Answer:
Clifford,
It is highly unusual that your pension fund rules determine your tax-free portion, because everyone else in SA has to abide by the Income Tax Act. We suspect your tax-free portion will also be governed by the Tax Act, unless you are a member of GEPF, benefiting from special rules relating to the pre-1998 period. On withdrawal, the Tax Act permits a tax-free portion of only R22 500 (R315 000 at retirement). This may be higher if your contributions were not tax-deductible (ie your contributions would be returned to your tax-free).
Ignoring the exact amount of your tax-free portion, you are permitted to transfer only a portion of your retirement fund proceeds to your preservation fund, and you will then still be allowed to make one (full or partial) withdrawal from this fund before you retire from the fund (earliest age 55). This withdrawal will be taxed per the withdrawal lump sum tax table, the same tax table that is likely to be applied to the cash lump sum you plan to take out on resigning. This tax table works on a cumulative basis, i.e. you don't get the same allowances twice.
