How will I be taxed if I withdraw my pension fund?

Question:

If I encash my pension fund, will I be taxed according to the PAYE tax rate or not?

Answer:

George,

You can only encash your pension fund if you withdraw (as opposed to retire) from your fund. If you retire, you can only encash up to one-third, with the balance you must purchase an annuity. If you withdraw (eg on changing jobs) you can encash the full amount, but the tax you pay on the cash lump sum will be more than if you retire from the fund (earliest age 55).

If you withdraw, the first R22 500 is not taxed. The balance up to R600 000 is taxed at 18%, the balance up to R900 000 at 27%, and the remainder at 36%. The effective tax rate you pay on a cash lump sum is lower than if the PAYE tax rates were applied.