Sars will deduct tax before you receive the lump sum — but there are a few options open to you.
I am retiring next year from the government. I will receive a monthly income and a lump sum of R1.2 million. I also have a separate retirement annuity and will use it to buy a living annuity. I am aware that any lump sum above R550 000 is subject to tax. Can I transfer the R1.2 million lump sum to my living annuity without incurring any tax?
Dear Reader,
The R1.2 million lump sum that you will receive from the Government Employees Pension Fund (GEPF) is the gratuity portion of your retirement savings. This amount is taxed prior to you receiving it and the tax paid will be as per the retirement tax table (shown below).
**Taxable income (R)****Rate of tax **1 — 550 0000% of taxable income550 001 — 770 00018% of taxable income above 550 000770 001 — 1 155 00039 600 + 27% of taxable income above 770 0001 155 001 and above143 550 + 36% of taxable income above 1 155 000Sars will deduct tax before you receive the gratuity. Once you receive the gratuity, it is not possible to get back the tax that was deducted. Once you receive the gratuity portion, it forms part of your discretionary monies — in other words, it is after-tax monies.
When you invest this money and draw an income from it, the tax is significantly lower than the tax you will pay on the income that you receive from the GEPF. This is because with after-tax monies, you only pay tax on the growth portion of the income and not the capital portion of the income.
To have more control over how much of your pension fund you withdraw as a lump sum and how much of it you convert into an annuity/income, you would have to opt for the retirement benefit from the GEPF.
In this case, you will not receive a gratuity portion and you will not receive a guaranteed annuity from the GEPF. Instead, you will effectively receive the combined value of the gratuity and annuity values.
Should you opt for the retirement benefit, you should then consider seeking advice from a suitably qualified financial planner, ideally one who is independent and is a member of the Financial Planning Institute. This is because the retirement benefit needs to be used to provide you with a retirement income. From the retirement benefit, you can decide how much you would like to withdraw as a lump sum. The maximum is one-third of the total benefit. Usually, it is tax-efficient to withdraw only the tax-free portion (R550 000) as a lump sum. This does depend on your objectives and circumstances though. The balance of the funds can then be used to implement a retirement income plan.
The GEPF’s default annuity strategy is a life annuity. It is possible to implement a retirement income plan similar to what the GEPF offers, with one of the product providers on the market, such as Old Mutual, Momentum, Sanlam, Liberty, Discovery and so on. Other options are the living annuity and the hybrid annuity.
It may be a valuable exercise to consult a financial planner prior to opting for the retirement benefit. I would suggest consulting a fee-based financial planner. In this way, they can do the analysis and planning, which involves understanding your objectives and circumstances and conducting an analysis between the GEPF offering and the various product providers on the market, to determine where you can get the best value for your pension savings.
With a fee-based financial planner, you can be certain that you are getting objective, unbiased advice, which may very well be staying with the GEPF.
You are welcome to contact us. Good luck and best wishes for your retirement.