You are Here > Home > My Retirement > How tax works on your retirement fund

How tax works on your retirement fund

Sep 30, 2021

How tax works on your retirement fundOne of the most common complaints I receive from pensioners is that they pay tax on their retirement benefits.

While one can sympathise with the plight of pensioners who often struggle to come out on their retirement income, one needs to understand the tax structure for retirement funds.

South Africa follows an “Exempt-Exempt-Taxable” (EET) regime, where contributions are deductible from your income and returns on your retirement investment are exempted from taxation, but benefits are treated as taxable income upon withdrawal or retirement. 

Contribution paid by the member is allowed as a deduction

During your working years, the contribution you make to your GEPF fund (or any retirement annuity) is tax deductible, subject to a limit of 27.5% of your income to a maximum of R350 000. This has the benefit of lowering your overall tax rate and taxable income during your working life.

For example, if you are under 65 years of age and have an annual taxable pensionable income of R300 000, in the 2022 year of assessment you would pay R44 990 in tax. If you contribute 7.5% of your salary to your GEPF fund, this would equate to R22 500 a year (R1 875 a month).

This is deducted from your salary and reduces your taxable income to R277 500. Now you only pay R39 140 in tax, which is a R5 850 (R44 990 minus R39 140) saving.  This is why we say the taxman partially funds our retirement. The more you contribute to retirement, the bigger your tax saving.

Contributions paid by your employer for your benefit (as a fund member) are taxable fringe benefits in your hands. However, you are treated as having made the contribution by your employer, so you can claim a deduction in respect of those employer contributions.

No tax on growth on the retirement fund

During your working life, your retirement fund grows tax free. This means there is no capital gains tax, no tax on interest and no dividend tax. Over a 30-year period, this could provide up to 30% more value at retirement because you did not pay those investment taxes.

The reason for these tax breaks is to encourage people to save for retirement. If you cash in your retirement fund when resigning, then the government wants to claw back some of those tax breaks.

That means you will pay tax on any withdrawal greater than R25 000. The withdrawal tax tables increase on a sliding scale, so the greater the amount you withdraw, the higher the percentage you pay in tax.

If, however, you are retrenched, then you can receive a total retrenchment package of R500 000 tax free, if you did not previously receive any other lump sums.

Tax on retirement income

The R500 000 tax-free amount applies to a lump sum commuted at retirement, as long as you did not receive any previous lump sums.

However, once your retirement benefit is used to provide you with a monthly income (pension/annuity), it is treated like any other income you may receive – in other words it becomes taxable. Remember this is not a double taxation as you received a full tax deduction on the contribution when you submitted your tax return while in employment.

The only good news for pensioners is that the percentage of tax paid reduces once you reach the age of 65 and again at the age of 75 as the tax thresholds increase at these ages. The tax thresholds for the 2022 tax year are as follows:-

SARS tax thresholds

Remember, when it comes to retirement planning, make sure you work on your after-tax income to calculate whether your income will be sufficient.

This article first appeared in City Press.


  1. Maya, pls clarify the R500k from the retrenchment. Should one wanna withdraw say from the preservation. Is there a R500k tax from the preservation fund for withdrawal or they will add the R500k from the retrenchment to the tax sliding scale of 18,27,36 percentages.

    • You get a once off R500 000 tax-free withdrawal at retrenchment. This can only be applied to your severance package and a withdrawal from your company retirement fund. As far as I am aware it does not apply if you take the one-off withdrawal from a preservation fund


Submit a Comment

Your email address will not be published. Required fields are marked *

Maya Fisher-French author of Money Questions Answered

Previous Articles

Video: Five ways to trick yourself into saving

Behavioural scientists have found that we feel loss far more greatly than gain, which is why the idea of cutting back on our lifestyle makes us very unhappy. We feel the sacrifice immediately but only reap the benefits in the future. While it may be a tough ask to...

When debt review works

Going into debt review is like going on a diet: it’s difficult to stick to and the results won’t be immediate, but it can be life changing. While there are serious issues around the way some debt counsellors conduct themselves, for Grace Bekwa, debt review gave her...

Listen: Creating Generational Wealth

Generational wealth is passed down from one generation to the next. But ultimately it has different context for different people. Generational wealth doesn’t have to be the Oppenheimer’s legacy. It could be leaving your children enough money to buy a home, or the...

What should you expect from a financial adviser?

I have worked in the financial industry for over 25 years and there is very little I don’t know about investing and managing money, yet I use a financial adviser. About 15 years ago I realised that while I knew about investing and money, I needed to have the input of...

SARS issues audit requests upon ceasing tax residency

The experts at Tax Consulting SA warn of the dangers of simply assuming you no longer have tax residency status in South Africa. There is an alarming number of South African expatriates relying on the 'tick-box' approach to cease their tax residency, while some simply...

Don’t rush into debt review

While debt review can be a lifeline for an over-indebted consumer, it should not be entered into lightly. You need to be aware that once you enter debt review, you cannot apply for new credit, and you cannot exit debt review until all your debts are settled. There is...

It’s time to spring clean your finances

“When you don’t know where your money is, when you have no filing system for your important documents, when you dive into your pocketbook to pull out crumpled bills, when your car looks like a garbage can, when your closets are filled with junk and clutter you cannot...

Funeral policy fraud on the increase

When fraudsters access your personal information, they can use this information to take out a funeral policy in your name, and then claim benefits on the policy using a fake death certificate and other supporting documentation. “Finding out you are the victim of a...

SARS issues guidance on crypto assets

On 27 August 2021, SARS provided further guidance on the correct tax treatment of crypto assets and how this must be declared in people’s tax returns. SARS published a document on its website entitled Crypto Assets & Tax. The publication should perhaps best be...

Self-service facility for GEPF members

Technology is making it easier for GEPF members and pensioners to keep track of their pension information and claims process. By downloading the new GEPF self-service mobile app onto your device, you can remove the frustration of standing in long queues at GEPF...

Pin It on Pinterest

Share This