Preparing for retirement and the options to consider

We understand that retirement is a milestone that that can leave you unprepared. However, you don’t have to feel like you’re alone on this journey. We believe that retirement benefit counselling (RBC) is essential in empowering you to make informed decisions about your retirement and your financial future. This guide will help answer any questions you may have and some you may not even have thought of. ​

Understanding your retirement fund options

It’s important to understand your retirement fund options as these can help you make better decisions to support a comfortable and confident retirement journey. ​

Fund preservation: This option allows you to keep your retirement savings invested when retiring, instead of cashing out. ​

Converting savings to income: This is your accumulated capital that is converted into a sustainable monthly income stream at retirement. ​

Risk and costs: Know into which investment portfolios your money is invested, the associated risks of your investments, and the administrative costs of your retirement fund. ​

South African tax implications for retirement benefits

​The growth within approved retirement funds (Pension, Provident, and Retirement Annuity (RA) Funds) is generally tax-free.

Tax is applied at two main stages: on contributions and on withdrawals/income.

• Important SARS tax rules

Contributions (by you or your employer) are deductible from your taxable income up to a limit of 27.5% of the greater of your taxable income or remuneration, capped at R350,000 per year.

• Lump sum options at retirement or /withdrawal

You can take up to one-third of your retirement benefit as a cash lump sum (if retiring from a RA, Pension, or Preservation Fund). The first R500,000 of the cumulative retirement/severance lump sum is currently tax-free. The balance is taxed according to preferential SARS tables.

• Annuity income

The regular monthly income you receive from your chosen annuity (either Living or Life) is taxed as ordinary income according to your marginal income tax rate and relevant tax thresholds.

• Death benefits

These benefits are paid to dependents/nominees as determined by the Fund's Trustees (Section 37C of the Pension Funds Act) and generally do not form part of your deceased estate, potentially avoiding executor fees and specific estate duty (on tax-deductible contributions).

Living Annuity vs. Life (Guaranteed) Annuity

At retirement, you must use at least two-thirds of your retirement capital to purchase an annuity to provide a regular income. The choice between a Living Annuity and a Life Annuity is critical, based on your risk tolerance and need for guaranteed income versus flexibility.

By law, the remaining portion of your retirement benefit (at least two-thirds for most funds) must be used to purchase an annuity to provide a regular income. You typically have two main options: a Living Annuity or a Life Annuity (also known as a Guaranteed Annuity).

How do you know if you should withdraw or not?

• ​The downside of withdrawal: Every amount you withdraw now is an amount that stops benefiting from tax-free compound growth. Early withdrawals also use up your lifetime tax-free threshold, meaning your future retirement lump sum will be taxed at a higher rate. The long-term cost to your total retirement capital can be significant.
• ​The prudent approach: Retirement savings are intended for retirement. If possible, avoid all pre-retirement withdrawals. At retirement, only take the cash lump sum you genuinely need, and keep the balance invested for income generation.

Tax implications of annuity income

The income received from both a Living Annuity and a Life Annuity is added to any other income you may have (e.g., rental income, part-time salary) and is taxed by SARS according to the normal personal income tax tables (Pay-As-You-Earn or PAYE).

• ​Tax advantage: In both cases, the underlying investments within the annuity structure grow free from Capital Gains Tax (CGT), which is a major benefit.
• ​Tax thresholds: You will benefit from the tax-free thresholds applicable to individuals based on age (primary, secondary, and tertiary rebates).

​​Retirement planning is complex, and the tax implications are critical to getting it right. Your Employer Benefit (EB) fund is designed to ensure you save sufficiently, but the final retirement decision rests with you.

​Speak to your financial adviser: Before making any decisions on withdrawing a lump sum or selecting an annuity type, we strongly recommend you seek professional advice. A qualified financial adviser can calculate your specific tax liability and help you structure your income to ensure your money lasts as long as you do.

​Review your finances

Be honest about how much cash you genuinely need. Minimising your lump sum withdrawal is one of the most effective ways to reduce your overall tax bill and improve your long-term retirement security.