Tax matters: retiring vs resigning

A Moneyweb reader asks:

I want to resign and have about R3 million with the Municipal Gratuity Fund. What’s the best option for this money to ensure a safe retirement and pay the lowest tax possible?

Dez Tswaile of Masthead Financial Planners answers:

Consider the pros and cons of resigning from full-time employment. I’d like to remind you of the difference in tax treatment between the two options.

Your fund is a dynamic defined contribution fund – a pension fund with provident fund rules. When you retire/resign as a member of this fund you can take a portion of your retirement interest (accumulated contribution and growth) or all of it as a lump sum, subject to tax. This fund also provides for a transfer of the money into a pension preservation fund subject to a zero tax bill, but your money will be taxed at withdrawal. Instead of making a lump sum withdrawal, you may purchase a living/life annuity which pays you an annuity income and then you’d be subject to income tax, but there are also a few exemptions applicable.

Tax is calculated on the gross retirement fund lump sum benefit after, for example, accounting for contributions to a fund which wasn’t exempt from tax. A person is entitled to claim a deduction of contributions made to certain retirement funds. These contributions, for tax purposes, are subject to limitation. If the deduction is limited, the amounts are carried forward to the following year of assessment and compounded.

When the person retires, the compounded or excess contributions that didn’t previously rank for deductions can be used to reduce the gross lump sum figure on which tax is calculated.

This doesn’t constitute financial advice. I recommend you consult an appropriately qualified advisor.