17 December 2025
As you approach retirement, one of the most critical decisions you will face is how to manage your accumulated retirement savings. Understanding the tax implications and the choices available specifically regarding lump sum withdrawals, living annuities, and life annuities is essential for securing your financial future.
When you retire from a retirement fund (Pension, Provident, or Retirement Annuity), you are entitled to take a portion of your benefit as a tax-free cash lump sum. However, withdrawing a larger amount, or making a withdrawal before retirement (e.g., on resignation), comes with significant tax consequences.
The tax on lump sums taken at retirement is calculated according to a special retirement tax table, which offers favourable rates on the first part of the withdrawal.
| Taxable income (R) rate of tax | |
|---|---|
R1 – R550,000 | 0% of taxable income |
R 550,001 – R770,000 | 18% of taxable income above R550,000 |
R770,001 – R1,155,000 | R39,600 + 27% of taxable income above R770,000 |
R 1,155,001 and above R143,550 | + 36% of taxable income above R1,155,000 |
Note on cumulative tax:
The tax-free amount (currently R550,000) and the tax brackets are a lifetime concession. This means any previous lump sums you have taken from any retirement fund (since October 2007) will be added to your current lump sum to determine the total tax liability. This can push your current withdrawal into a higher tax bracket.
If you resign or withdraw a lump sum before retirement (e.g., from a Provident Fund or an accessible 'Savings Pot' under the future two-pot system), a harsher tax table applies:
| Taxable income (R) rate of tax | |
|---|---|
R1 – R 27,500 | 0% of taxable income |
R 27,501 – 726,000 | 18% of taxable income above R27,500 |
R 726,001 – 1,089,000 | + 27% of taxable income above R726,000 |
R 1,089,001 and above R223,740 | + 36% of taxable income above R1,089,000 |
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.
Annuities: converting savings into an income
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).
| Living Annuity | Life Annuity |
|---|---|
A Living Annuity is a retirement income product with its investment value linked to financial markets, and fluctuates in value. The investment risk and longevity risk sits with the purchaser. | A Life Annuity (also known as a Guaranteed Annuity). is a retirement income product which converts your retirement into a regular income for the rest of your life. The longevity risk and some or all of the investment risk (depending on the type of annuity) sits with the insurer. |
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.
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