Our Minister of Finance gave fund members some good news when he announced the latest budget. For the first time in nine years, the tax scale amounts for lump sum retirement benefits were adjusted as from 1 March 2023 by about 10% (to compensate for inflation at a rate of 1% per year?) to lower the tax burden as shown below:
| 2022/2023 | 2023/2024 | ||
|---|---|---|---|
|
Taxable Income |
Rates of Tax |
Taxable Income |
Rates of Tax |
|
R0 – R500 000 |
0% |
R0 – R550 000 |
0% |
|
R500 001 – R700 000 |
18% on taxable income above R700 000 |
R550 001 – R770 000 |
18% on taxable income above
R770 000
|
|
R700 001 – R1050 000 |
R36 000 + 27% of taxable income above R700 000 |
R770 001 – R1 155 000 |
R39 600 + 27% of taxable income above R770 000 |
|
R1 050 001 and above |
R130 500 + 36% of taxable income
of above R1 050 000
|
R1 155 001 and above |
R143 550 + 36% of taxable income of above R 1 155 000 |
The limit of the tax-free amount was raised from R500 000 to R550 000. It is always nice to have an extra R50 000 in your pocket, but does the tax change result in you receiving an extra R50 000 in your pocket at retirement? Not really. As the table below illustrates, the adjustment of the tax scales on lump sum retirement benefits results in a tax reduction and thus cash in your pocket of only R9 000 at the lower end of the scale and limited to only R22 950 at the top end of the scale.
| Lump Sum Amount | Tax Payable 2022 | Tax Payable 2023 | Tax reduction |
|---|---|---|---|
|
R500 000,00 |
R0,00 |
R0,00 |
R0,00 |
|
R550 000,00 |
R9 000,00 |
R0,00 |
R9 000,00 |
|
R600 000,00 |
R18 000,00 |
R9 000,00 |
R9 000,00
|
|
R700 000,00 |
R36 000,00 |
R27 000,00 |
R9 000,00 |
|
R800 000,00 |
R63 000,00 |
R47 700,00 |
R15 300,00 |
|
R900 000,00 |
R74 700,00 |
R90 000,00 |
R15 300,00 |
|
R1 000 000,00 |
R117 000,00 |
R101 700,00 |
R15 300,00 |
|
R1 500 000,00 |
R292 500,00 |
R269 550,00 |
R22 950,00 |
|
R2 000 000,00 |
R472 500,00 |
R449 550,00 |
R22 950,00 |
|
R2 500 000,00 |
R652 500,00 |
R629 550,00 |
R22 950,00 |
|
R3 000 000,00 |
R832 500,00 |
R809 550,00 |
R22 950,00 |
|
R5 000 000,00 |
R1 552 500,00 |
R1 529 550,00 |
R22 950,00 |
|
R10 000 000,00 |
R3 352 500,00 |
R3 329 550,00 |
R22 950,00 |
The “gift” of a reduced lump sum retirement benefit tax bill is always welcome, but as it is illustrated above, the benefit might be significantly less than it seems at first glance. The annual inflation linked adjustments to the income tax scales offer a greater benefit than an adjustment of the lump sum tax scale by 10% every nine years. Put differently, over time, the reduction of the annual income tax payable on annuity income from your retirement fund might be more significant from an inflation perspective than the ad hoc changes to the lump sum tax scale every few years.
It is therefore important to obtain the advice of a financial advisor and tax expert to strike the right balance between the part of your retirement savings you take as a tax-effective lump sum benefit and the part you use to buy a “tax-free” annuity income stream to meet your living expenses after retirement. It might make sense to take less as a lump sum benefit at retirement at a lower tax rate than the tax you will pay on your monthly annuity.
To the loyal readers of my book, Pensions for Palookas, please take the new tax scales on lump sum retirement and lump sum withdrawal benefits into account when you use my book for your retirement planning as the content of the book reflects the tax scales that were in place when the book was published.