Can I transfer my severance benefit into a retirement fund?


Question:

can one transfer a severance package into a pension & provident preservation fund.

Answer:

Senzo, Since 1 March 2011, special tax rates apply to severance benefits, based on the retirement lump sum tax table. This means that the first R500 000 is not subject to tax, the next R200 000 is taxed at 18%, the subsequent R350 000 at 27% and all amounts above R1 050 000 at 36%. Leave pay and pro-rata bonuses that are paid at the time of the employment is terminated do not form part of a severance benefit and are subject to normal income tax. To qualify for this special "severance" tax rate, the employer must pay the employee a lump sum as a result of their employment having been, amongst other things, terminated or lost, for example if: - the employer stops (or intends to stop) trading; or - the employer embarks on a general reduction in personnel (not applicable to restructuring of employees). 

It is important to understand that this severance benefit is, for tax purposes, treated as a retirement lump sum payment. This has the following consequences: - The employer must submit a tax directive application to SARS before the lump sum amount can be paid - The amount taxed in terms of the retirement lump sum tax table is reduced by previous lump sum benefits received - The lump sum benefit received reduces the lump sum tax benefit available at a subsequent withdrawal or at retirement from a retirement fund -  The amount can be transferred tax-free either to a retirement annuity or a preservation fund Important caveat: If the severance benefit is transferred to a preservation fund, it loses its "identity" as a severance benefit. Although the employee will be entitled to make one full or partial withdrawal from the preservation fund before retirement (earliest age 55), this will be taxed as a normal withdrawal from the preservation fund, per the withdrawal lump sum tax table: the first R25 000 is not taxed, the balance to R660 000 is taxed at 18%, the balance to R990 000 at 27% and the remainder at 36%. 

This is an important consideration. Employees who choose to preserve with the intention of accessing this money before retirement, lose out on the-tax free benefit they could have enjoyed, either at the time of severance or at retirement.

The information and answers supplied in this section do not constitute advice as defined by the Financial Advisory and Intermediary Services Act, 37 of 2002.


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