I understand that R120 000 of the lump sum is tax free. How does the new tax law affect the balance of the lump sum? Also, does the abolishment of taxes on retirement funds mean that you receive the balance shown on your statement without being taxed?

Answer:
If you take a third as a lump sum, the first R120 000 is tax free, but the rest you will pay tax on. Ian McDonald, national manager of financial planning at MortgageSA, says that the abolishment of retirement fund tax only applies to the taxes levied on retirement funds under management of financial institutions (Tax on Retirement Funds Act 38 of 1996) which is currently levied at nine percent on interest (not capital growth).

It was lowered last year from 18 percent; however, there have been calls year in and year out before the Budget speeches to do away with this tax as it effectively taxes the same money twice — that is, the money in the funds are taxed at nine percent and then the annuitant is taxed on the income he/she draws from the funds in his/her retirement years.

So in other words, you will still be taxed on the balance of the funds. Retirees will benefit because more money stays in the fund to grow. McDonald says that currently individuals can claim a tax break of up to 15 percent for their retirement annuity contributions (but limited to the actual amount if it is less than 15 percent). This is for people who do not belong to a retirement fund.

Just a word of caution: as appealing as early retirement sounds, many people find themselves under-funded. Make sure that your investments will be able to support an extended retirement.

I strongly advise that you see a financial advisor to ensure the careful management of your funds. If you are going to fall short, try to find another job so that your retirement funds are left to grow for a few more years.