Question:
I want to enquire about tax when building up money for retirement. Will I get taxed if I put my money in a retirement annuity (RA)? I know the pension will get taxed per month, but what about the capital with its growth in the RA?

My current retirement money in my job is held in a Provident Contribution Fund. If I leave that fund at age 54, and move it to an RA to buy a pension, will the money get taxed before it goes to the RA?

Answer:
Perhaps the best way to understand and contextualise the question at hand is to firstly explain which retirement vehicles are available for pre-retirement accumulation as well as those that are utilised post-retirement to fund ones lifestyle by means of income generation. Then, secondly, we will explore potential tax considerations before, upon and after retirement.

When it comes to retirement vehicles available before retirement and for the purposes of accumulating retirement savings, there are essentially three vehicles that are used:

• Retirement annuity

  This is a stand-alone retirement fund most commonly used by self-employed individuals and those working in companies that offer no pension/provident benefits. With the exception of specific circumstances, one may only access these funds upon reaching the age of 55.

• Pension fund

  This is the most common retirement vehicle for companies with an existing pension fund where employers and employees contribute, usually in equal parts. Upon resignation/termination of services before retirement, this may be moved to a new employee (provided the fund rules allow for it), withdrawn or transferred to a pension preservation fund.

• Provident fund

  This is also commonly used where a company has an existing provident fund. Contributions are determined by 'salary sacrifice'. In other words, an employer may offer a cost to company package where you will elect how much will be deducted from the package to go towards retirement funding before gross income is established for income tax purposes. Upon resignation/termination of services before retirement, this may be moved to a new employee (provided the fund rules allow for it), withdrawn or transferred to a provident preservation fund.

  Upon retirement, one has accessibility to a lump sum amounting to a portion (1/3rd) or all of the retirement benefit. This depends on which vehicle we are dealing with and will be explained in more detail under the taxation section on page two and three. The balance of the fund (if any), is then transferred into one of the following post-retirement vehicles for income generation:

  • Individual Living Annuity

  • Conventional Life Annuity

(Click here to learn more about Individual Living Annuities and Conventional Life Annuities and how to decide between the two.)

On page two: All about tax, pre-retirement.

On page three: All about tax, upon retirement and thereafter as well as a tax table according to which lump sums are taxed.

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