Question:
In 1998 I took early retirement after 36 years of unbroken service with a major company. I was hard-talked by my financial adviser to take out one-third of my pension — of which about R400 000 was my maximum tax-free amount — and invest it with Old Mutual. I did not mature two retirement annuities which I had. Since then I have gone back to work with various other companies on a contract basis and have taken out two further retirement annuities.

When I finally mature my retirement annuities (one of which will have been in existence for more than 25 years), will I be entitled to any further tax-free amounts on a lump-sum withdrawal?

I have been given diametrically opposed answers by two qualified financial advisers employed by leading South African companies who were, or should have been, well aware of my personal and financial circumstances. One must be wrong!

Answer:
I can certainly understand your frustration — planning appropriately for retirement is fundamental to any holistic financial plan.

Let us look at your situation step by step:

• When retiring from a pension fund, one is able to access up to a third of the full benefit as a lump sum, as you did. Whatever amount is taken as a lump sum is then subject to taxation with a portion of that lump sum being tax-free and the balance taxable.

• A formula, known as Formula B, is applied when calculating the tax-free portion of any lump sum retirement benefit received from a retirement fund at any time. While the application of the formula changed in October 2007, the formula itself remains the same. Before October 2007, in most cases, an amount of R120 000 would have been tax-free (limited obviously to the third that you may access as a lump sum).

• You mentioned that you received R400 000 tax-free in 1998. This is an interesting situation since your tax-free portion clearly exceeds R120 000. From this I can only assume that you were a member of a government or quasi-government type fund. Members of these funds received all lump sum benefits that were accumulated before March 1998 totally tax-free in principle. Formula B would only have been applied to any potentially taxable portion, being any portion of the lump sum benefit that you accumulated after March 1998. You don’t mention in which month of the year you retired. If you retired before the end of March 1998, your total lump sum benefit would be tax-free in principle without application of the formula. If you retired up to December 1998, a maximum of nine months’ worth of accumulated benefit would have been subjected to the formula (and then fallen within the R120 000 rendering even that potentially taxable portion tax-free). This all sounds a bit technical, but it is important to understand that Formula B was only applied to a potentially small portion of your lump sum, if to any portion at all.

• When you finally retire from your retirement annuities sometime in the future, the same Formula B will be applied. As I mentioned, in October 2007 the application of the formula changed. Whereas before R120 000 would likely have been tax-free, that amount has in principle increased to R300 000. So if you retire now, R300 000 will be tax-free less any amounts previously received tax-free in consequence of applying Formula B. I don’t have enough information to ascertain exactly what portion of your R400 000 was tax-free in principle (acquired before March 1998) and what portion was tax-free after application of the Formula B. Whatever the latter amount is, that would be deducted from your R300 000. Without getting even more technical, you may also increase the R300 000 if you had any retirement annuity contributions which were at no stage deductible for income tax purposes.

You mentioned that you previously discussed this very matter with two financial planners. I strongly suggest that you take this up again with a Certified Financial Planner who will be able to do the specific calculations for you. If you do not feel comfortable taking advice from the two planners already consulted, I would strongly suggest you utilise the link provided to be put in touch with a planner who will be able to deal with your matter.

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