By Tkay Nthebe
As a member of a retirement fund, understanding how retirement benefits are taxed forms a critical part of your retirement plan. A question I often receive from members of retirement funds is ‘Will my retirement benefits be taxed when I retire?”
In this week’s article, I discuss the taxation and treatment of retirement benefits.
According to the Income Tax (Amendment) Act No.11 of 2012 and Income Tax (Superannuation and Life Assurance) Regulations of 1994, retirement benefits received from employment shall be exempt from income tax if they do not exceed 25% of the basic salary earned during the period of employment. The Act further explains that retirement benefits in this context means gratuity, severance pay, benefits from a complying pension or provident fund (also referred to superannuation fund).
How are retirement benefits taxed?
Meet Tsietsi, who is a member of a defined contribution provident fund with a monthly salary of LSL10 000 and has been working for 30-years. Because pension or provident contributions are tax deductible up to 20% of employment income, Tsietsi contributes 10% and his employer contributes 10%.
On retirement, Tsietsi has accumulated a total of LSL1 600 000 in retirement benefits and is wondering what the tax implications will be when he retires.
Table 1: Tsietsi’s salary and provident fund
| Annual salary (12-months) | Lifetime (30 years) | |
| Basic salary | LSL120 000 | LSL3 600 000 |
| Provident benefits accumulated | LSL1 600 000 | |
| Tax exemption allowed – 25% maximum cap of total basic salary (LSL3 600 000 *25%) | LSL900 000 |
Table 1 above shows that Tsietsi earned a total basic salary of LSL3.6million over his 30-year working life and accumulated a provident fund benefit of LSL1.6million. Tsietsi is allowed a maximum tax exemption limit of up to LSL900 000, which is 25% of his total basic salary. Because Tsietsi is a member of a provident fund, he is allowed to take the entire LSL1.6million as cash or use some of it buy an annuity (pension income).
What are the tax implications for Tsietsi?
If Tsietsi decides to take the whole LSL1.6million benefit as cash, LSL900 000 of the benefit will be exempt from tax as shown in table 2 below. The remaining balance of LSL700 000 will be taxed at 25% and Tsietsi will pay a tax of LSL175 000.
Should Tsietsi decide to take one third i.e., LSL533 333 of his benefit as cash and two-thirds to buy an annuity, he will qualify for the tax exemption because his benefits do not exceed 25% of his total basic salary. The two-thirds amounting to LSL1 066 667 used to purchase an annuity will taxed according to the normal tax tables.
Table 2: Tax exemption calculation
| If Tsietsi takes 100% of benefit | If Tsietsi takes one-third as cash and buys annuity | |
| Total provident fund benefit | LSL1 600 000 | LSL1 600 000 |
| Tsietsi’ total cash out | LSL1 600 000 | LSL533 333 |
| Less tax exemption | (LSL900 000) | (LSL900 000) |
| Taxable benefit amount | LSL700 000 | (LSL366 667) |
| Benefits taxed at a rate of 25% | LSL175 000 | Nil |
For more information regarding the taxation and treatment of retirement benefits, speak to a qualified tax consultant or a financial planner.
