Question:
Good morning Reading the FAQ's repeated mention is made to "on retirement" and "before retirement" What is the definition of "retirement" . Apologies if this is a stupid question. Kind regards Andre
Answer:
Andre, There are no stupid questions, just stupid answers. It can actually be quite confusing.
Each fund's rules will state a "normal retirement age" (usually between 60 and 65). Once you reach normal retirement age, you are required - on leaving your employer (which may be later than this "normal retirement age") - to retire from the fund. If you belong to a pension/pension preservation fund, you are then required to use at least two-thirds to buy an annuity. There is presently no such annuitisation requirement from a provident/provident preservation fund. Any lump sum you take on such "retirement" is then taxed per the retirement lump sum tax table. The retirement lump sum tax table provides as follows: the first R500 000 is not taxed, the balance to R700 000 is taxed at 18%, the balance to R1 050 000 at 27% and any amounts above that at 36%.
Most funds permit members to retire early. The Income Tax Act permits retirement from age 55. Members who retire early from their employer and choose to retire from the fund get the benefit of the retirement lump tax table but also the obligation of having to annuitise two-thirds (if they belong to a pension fund). Members who leave their employer before reaching "normal retirement age" have the option to "withdraw" rather than "retire" from the fund. There is then no obligation to use two-thirds to buy an annuity for pension fund members, the full amount can be taken as a lump sum. But the withdrawal lump sum tax table then applies: the first R25 000 is not taxed, the balance to R660 000 is taxed at 18%, the balance to R990 000 at 27% and the remainder at 36%. In other words, withdrawing comes with a higher tax burden but avoids the annuitisation requirement on pension (preservation) funds. But this choice falls away once the member has reached "normal retirement age'"
