RETIREMENT PLANNING VEHICLES:  A COMPARISON

Provident fund

Pension fund

Retirement annuity

Administrative requirements

Must be approved by the Registrar (Pension Funds Act).

Must be approved by Commissioner of SARS

Membership agreement between employer/employee:

New fund – employee          choice

Existing fund – compulsory

Must be approved by the Registrar (Pension Funds Act).

Must be approved by Commissioner of SARS

Membership agreement between employer/employee:

New fund – employee          choice

Existing fund – compulsory

Must be approved by the Registrar (Pension Funds Act).

Must be approved by Commissioner of SARS

No agreement between employer/employee required

Fund must be registered

Fund must be registered

Fund must be registered

Deductible Contribution

Employer

Employer

Employer

10% of approved remuneration for pension, provident funds and medical aid schemes.  In practice up to 20% is allowed if justifiable.

Section 11(i)

10% of approved remuneration for pension, provident funds and medical aid schemes.  In practice up to 20% is allowed if justifiable.

Section 11(i)

No contribution

Not tax deductible

Deductible with max. of the greater of:

-  R1 750

Or

-  7.5% of pensionable remuneration

(limit also applies to government employees)

Section 11(k)(i)

Any disallowed excess may not be carried forward to the following year of assessment.  The disallowed excess is allowed as a deduction at retirement.

Deductible with max. of the greater of:

-  15% of non-retirement funding taxable income;

or

R3,500 – allowable pension fund contribution;

or

-  R1,750

Arrear

Not tax deductible

R1 800 deductible p.a.

Section 11 (k)(ii)(aa)

Any excess above R1800 may be carried forward to the following year of assessment.

R1 800 deductible p.a.

Section 11 (k)(ii)(aa)

Any excess above R1800 may be carried forward to the following year of assessment.

RETIREMENT BENEFIT

No tax payable on lump sums for individuals with a taxable Income of R46 000 or less.  (With effect from 1 March 2008)

Cash Lump Sum

Cash Lump Sum

Entire amount or surrender value of policy

1/3 of total value (if 2/3 of the total value of the annuity that is due upon retirement is less than R50,000, full benefit) Section 1 “pension fund” (c)(ii)(dd) Balance used to purchase a comp. annuity taxed i.t.o. tax tables.

1/3 of total value (if 2/3 of the total value of the annuity that is due upon retirement is less than R50,000, full benefit) Section 1 “pension fund” (c)(ii)(dd) Balance used to purchase a comp. annuity taxed i.t.o. tax tables.

Tax free portion

Tax free portion

Z = C + E – D (Formula B)

Where:

Z = tax free amount

C = R300 000 (this limit applies over the tax payers life time and is applicable in respect of all funds to which the taxpayer belongs).

E = previous disallowed own contributions, tax free transfers from public sector funds and divorce order amounts transferred from approved funds.

D = total previous tax free deductions allowed to the taxpayer in respect of paragraph 5 of the second schedule.

Second Schedule

Z = C + E – D (Formula B)

Where:

Z = tax free amount

C = R300 000 (this limit applies over the tax payers life time and is applicable in respect of all funds to which the taxpayer belongs).

E = previous disallowed own contributions, tax free transfers from public sector funds and divorce order amounts transferred from approved funds.

D = total previous tax free deductions allowed to the taxpayer in respect of paragraph 5 of the second schedule.

Second Schedule

Z = C + E – D (Formula B)

Where:

Z = tax free amount

C = R300 000 (this limit applies over the tax payers life time and is applicable in respect of all funds to which the taxpayer belongs).

E = previous disallowed own contributions, tax free transfers from public sector funds and divorce order amounts transferred from approved funds.

D = total previous tax free deductions allowed to the taxpayer in respect of paragraph 5 of the second schedule.

Second Schedule

Taxable portion

Taxable portion

Taxable portion

Taxed as per table in item 7 of Appendix 1 to the Income Tax Act as follows:

The first R300 000 of the taxable amount at 18%

The next R300 000 of the taxable amount at 27% and

The balance of the taxable amount at 36%

Section 5(2)

Taxed as per table in item 7 of Appendix 1 to the Income Tax Act as follows:

The first R300 000 of the taxable amount at 18%

The next R300 000 of the taxable amount at 27% and

The balance of the taxable amount at 36%

Section 5(2)

Taxed as per table in item 7 of Appendix 1 to the Income Tax Act as follows:

The first R300 000 of the taxable amount at 18%

The next R300 000 of the taxable amount at 27% and

The balance of the taxable amount at 36%

Section 5(2)

Retirement Benefit (Public Sector Funds)

All lump sum benefits paid from a public sector fund were all tax-free until 1 March 1998

Thereafter parity between public and private sector fund taxation.  Vested rights are protected by formula C in the Second Schedule to the Income tax Act.  If a Public Sector fund is involved, the following calculation must be done:

All lump sum benefits paid from a public sector fund were all tax-free until 1 March 1998

Thereafter parity between public and private sector fund taxation.  Vested rights are protected by formula C in the Second Schedule to the Income tax Act.  If a Public Sector fund is involved, the following calculation must be done: