Resigning to access retirement savings | Fin24
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Resigning to access retirement savings

Oct 15 2014 16:39

A Fin24 user says he is forced to resign from his job so that he can withdraw money from his retirement savings. He writes:

I have had a Preserver with Momentum since 2001 and have taken a certain amount when I was retrenched that same year.

My Preserver now stands at R226 400. I have been advised that if I want to take another amount I must resign and could then take a third of the balance, while two-thirds must go towards an annuity.

My situation forces me to do this. My wife is not working and our medical savings account is depleted, while we need monthly medicine of R1 201.

I do, however, have a pension with Zurich Insurance and am still working - I am 57 years old.

I would like to know what the tax deduction will be if any?

Pieter Faber, technical executive: tax law & policy at the SA Institute of Tax Professionals (Sait), responds:

We assume that the fund is a pension preservation fund. It is unclear whether the 2001 withdrawal was from the transferring fund amount or whether it was a subsequent withdrawal from the pension preservation fund.

Based on the facts it would seem to be the latter and that you have used your single withdrawal from the preservation fund - as determined in paragraph (c) of the definition of "pension preservation fund" in section 1 of the Income Tax Act.

Depending on the rules of the fund, most funds allow a person to retire from the preservation fund once such person has reached the age of 55 years - as per the definition of "normal retirement age" in paragraph (b) of the definition in section 1 of the Income Tax Act - notwithstanding that such person may still be in employment.

The two-thirds monthly annuity from the fund will be subject to employees' tax and taxed according to the normal income tax rates - in Appendix I paragraph 1 of the Rates and Monetary Amounts and Amendment of Revenue Laws Act - per the schedule as if the payment was made by an employer in respect of an employee.

The one-third lump sum amount received will constitute a retirement fund lump sum benefit (as defined in section1) for the purposes of paragraph 2(1)(a)(i) of the Second Schedule.

The tax on the lump sum will be calculated in terms of paragraph 7(b)(i) of Appendix I.

In respect of historical amounts the calculation only considers lump sum withdrawals after March 1 2009, previous retirement lump sums after October 1 2007 and previous severance benefits received after March 1 2011.

You state that you receive a pension from Zurich insurance, but do not state whether you received a lump sum on retirement, we assume at 55 years old.

If you only receive a monthly pension it will not affect the calculation. If however, you received a lump sum after October 1 2007 from Zurich, this will have to be considered in calculating the tax amount on the current lump sum.

The current tables will apply at a rate of 0% to the aggregate of the first R500 000 received.

The current third is R226 400 which is below this threshold.

If the previous amount together with this amount is in aggregate less than R500 000, no tax would be withheld.

If, however, the aggregate of the amounts exceeds R500 000, the tax must be determined according to the rate table.

In determining the actual normal tax liability on the amount, there must be deducted from the amount calculated an amount as calculated under the current rates table in respect of the aggregate of the previous amounts.

Therefore, if the historical amount was paid while the threshold was R315 000 (for example R450 000) and tax was paid on this amount, such tax actually paid would not be considered for reduction as under the current table, tax of Rnil - that is less than R500 000 - would apply.

ALSO READ: Tax on withdrawal from preservation fund

- Fin24

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tax  |  retirement  |  savings  |  money  |  money clinic


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