Lump Sum Benefits

Taxation Laws Amendment Act 2007

Certain lump sum payments received on termination of service, qualify for taxation at the average rate of tax. The average rate of tax to be used in determining the tax liability on the lump sum will be the higher of the average rate of tax in respect of taxable income (Excluding the lump sum) accrued in the current and preceding years of assessment.

Lump sum payments received by the taxpayer from his employer by way of bonus, gratuity or compensation upon either reaching the age of 55, retirement due to superannuation, ill health or other infirmity is tax free to a maximum of R30 000 over the lifetime of the taxpayer.

Furthermore, all employees who lose their jobs as a result of either the employer ceasing to operate or because of a general reduction of staff, will qualify for the R30 000 tax free concession regardless of age. This exemption will however not apply to any present or past director of the employer company nor to any shareholder who holds or held more than 5% of a company’s shares.

Lump sums paid by the employer as a result of the death of any person that arises out of the course of the employment of that person, may qualify for an exemption up to the amount of R315 000. The exempt amount must be reduced with the portion of a lump sum that qualified for the R30 000 exemption, as mentioned in the prior paragraph.

Lump sum benefits payable by approved funds are aggregated for tax purposes and subject to tax as detailed below.

On retirement or death:

Pension Funds, Retirement Annuity Funds and Provident Funds.

A maximum of one third of the taxpayer’s entitlement from a pension or retirement annuity fund may be commuted to a lump sum.

The taxable portion of the lump sum from a pension, provident or retirement annuity fund received on or after 1 October 2007 as a result of death or retirement is calculated as :

The total lump sum less the deductible amount

The deductible amount is calculated by means of a formula B which is as follows :

Z = C + E – D where

Z is the deductible amount / C is a fixed amount of R315 000 less any withdrawal benefit deducted after 1 March 2009 the taxpayer qualifies for this deduction once during his or her lifetime / E is the sum total of fund contributions made by the taxpayer that did not qualify as a deduction during prior years / D is the sum of all the Z-values deductible amounts allowed in prior years.

The taxable portion of the lump sum on death or retirement is taxed separately from the other taxable income of the taxpayer at the following tax rate :

Retirement or death:

Taxable Amount

Tax Liability

Up to R315 000 0%
R315 001 – R630 000 18% x taxable amount in excess of R315 000
R630 001 – R945 000 R56 700+ 27% of the amount above R630 000
R945 001 and above R141 750 + 36% of the amount above R945 000

On withdrawal of the fund:

With effect from 1 March 2009, the exempt portions, upon withdrawal, will be as follows :

Pension funds:

The tax-free portion will be R22 500 plus any amount paid into any approved pension fund or retirement annuity fund

Retirement annuity fund:

The tax-free portion will be R22 500, plus the amount paid into another retirement annuity fund or used to purchase an approved insurance policy that provides benefits similar to a retirement annuity fund.

Provident funds:

The tax-free portion will be R22 500, plus any amount paid into any approved pension, provident or retirement annuity fund.

The taxable portion of a lump sum upon withdrawal from a fund will be taxed separately from other taxable income, with effect from 1 March 2009. The rate will be as follows :

Withdrawal from retirement savings:

Taxable Amount

Tax Liability

R0 – R22 500 0%
R22 501 – R600 000 18% of the amount above R22 500
R600 001 – R900 000 R103 950 + 27% of the amount above R600 000
R900 001 and above R184 950 + 36% of the amount above R900 000

In all cases, the tax-free portions from either a pension, provident or retirement annuity fund shall not be less than the lesser of the lump sum benefit or any contributions made to the fund by the member which were not previously allowed as deductions.

New Proposed Rules on Withdrawal of Pension, Provident Funds, Preservations Funds is NOT YET being applied by SARS.

The new changes to tax on withdrawal (As announced in the Budget Speech for 2009) have not yet been promulgated into law. This causes much confusion as Sars is applying the new R22500 tax free allowance but the balance of the benefit is still being taxed at old average rates as was the case prior to 1/3/2009. SARS have confirmed that they will only change their systems to apply the table when it is passed into law which they expect will be in the latter part of this year. As the expectation is that it will apply retrospectively to 1 March 2009 SARS have advised that any member who is over taxed as a result of this will be reimbursed with their next assessment. (i.e. 2010 tax year.)

  • Small annuities – retirement benefits of R75 000 or less, may now be commuted in full as a lump sum. Previously pension and retirement annuity funds could pay out only up to one third of the retirement benefit in a lump sum and the balance of the fund was used to purchase a compulsory annuity and only benefits of R25 200 could be commuted in full.
  • Draft legislation to be tabled in Parliament shortly should bring relief to divorcees who have been unable to access their share of their former spouses’ retirement funds despite recent changes to the law and a ruling on the matter by the Pension Funds Adjudicator. A Personal Finance report says the draft General Financial Services Laws Amendment Bill contains provisions to amend the Pension Funds Act to clearly state thatevery divorcee who has been awarded a share of a former spouse’s retirement fund in a divorce order will be able to access the benefits with effect from 13 September 2007. The efforts of many divorcees who were divorced before this date to access these benefits have been thwarted by retirement funds and their administrators, which claimed that the law was unclear. An amendment to the Pension Funds Act promulgated in September was intended to introduce a ‘clean break’ in pension interests on divorce for all divorcees. But legal advisers to funds and their administrators argued that it was incorrectly drafted and applied only to divorce orders made after the amendment was promulgated.