By Brett Ladouce
Our Minister of Finance - Enoch Godongwana - gave pension fund members some good news in his latest budget. For the first time in nine years, the tax scale amounts for lump sum retirement benefits were adjusted.
The tax scale amounts for lump sum retirement benefits were adjusted on 1 March 2023 by about 10% to compensate for inflation at a rate of 1% per year and to lower the tax burden on members of a pension scheme.
The limit of the tax-free amount was raised from R500 000 to R550 000.
It is always nice to have an extra R50 000 in your pocket, but does the tax change result in you receiving that extra R50 000 in your pocket at retirement?
Not really.
As the table below illustrates, the adjustment of the tax scales on lump sum retirement benefits results in a tax reduction and thus cash in your pocket of only R9 000 at the lower end of the scale and limited to only R22 950 at the top end of the scale. That makes for a big difference.
The “gift” of a reduced lump sum retirement benefit tax bill is always welcome, but as it is illustrated, the benefit might be significantly less than it seems at first glance. The annual inflation linked adjustments to the income tax scales offer a greater benefit than an adjustment of the lump sum tax scale by 10% every nine years.
Put differently, over time, the reduction of the annual income tax payable on annuity income from your retirement fund might be more significant from an inflation perspective than the ad hoc changes to the lump sum tax scale every few years.
It is therefore important to obtain the advice of a financial adviser and tax expert to strike the right balance between the part of your retirement savings you take as a tax-effective the lump sum benefit and the part you use to buy a “tax-free” annuity income stream to meet your living expenses after retirement. It might make sense to take less as a lump sum benefit at retirement at a lower tax rate than the tax you will pay on your monthly annuity.
Ladouce is a pension funds lawyer and the author of the book, Pensions for Palookas.
PERSONAL FINANCE