What tax will I pay when I retire?

At retirement, members of most funds are entitled to take a certain amount of their retirement savings in cash and a certain part of that cash sum can be taken tax free.

Beyond that, tax rates apply according to the tax table for retirement lump sums. It’s a progressive tax rate, which means the more you take, the higher the effective tax rate you will pay.

It is also a tax table that applies to all such lump sums taken over your lifetime and takes into account amounts you have withdrawn from a fund before.

The tax calculation gets more complicated if you have previously withdrawn or retired from a fund.

It is also more complex if you were a member of public sector or government retirement fund before March 1 1998, as you are entitled to take the amount that you accrued in your retirement fund before that date tax free.

The tax calculation will be performed for you when you inform your fund you want to retire and your fund applies for a tax directive from the South African Revenue Service (SARS). You have a right to request your retirement fund administrator to ask SARS what your tax free amount is before you apply for a directive.

If you want to know what to expect, without taking the rights of government employees who saved pre-1998 into account, here is how to work out how much tax you will pay on any amount taken in cash at retirement.

1. Work out how much you plan to take in cash within the limits you are allowed to take (for most people, that will be up to one third of their retirement savings).
2. Add to that any lump sums you have taken as a withdrawal benefit since March 1 2009.
3. Add to that any lump sums you have taken as retirement lump sums since October 1 2007.
4. Add to that any severance benefits you have taken since March 1 2011.
5. Add in any lump sums you have taken on retrenchment, including any severance benefits.
6. Deduct any contributions that were not allowed as a deduction previously.
7. According to the amount, apply the following table:

8. From the tax calculated, deduct any tax paid on previous withdrawals since March 2009 or on previous retirement since October 2007.

Any amount you transfer to an annuity is not taxed at the time of your retirement, and if you transfer to an investment-linked living annuity, any further investment growth is tax-free.

When you receive a pension from your annuity (living or guaranteed), the income will be taxed at your marginal tax rate.

If you are 65 or older when you retire, your marginal rate will be lower than it was when you were working, as you will be able to apply the secondary tax rebate. And when you reach age 75, a third rebate applies.

In addition, your annuity or pension is likely to be lower than your income was when you were working. This will also reduce your tax rate.