Don’t be lured by relief on lump sum

THE national budget announcement that moved the tax threshold applied to lumpsum withdrawal benefits from retirement funds came somewhat as a surprise. All the Treasury discussion papers of the past two years pointed towards further preservation of retirement fund investments. These tax thresholds have hardly moved since 2007.

Since March 1, the taxpayer has been able to receive R500 000 tax-free on retirement (previously this amount was R315 000).

The 18% tax band was extended to R700 000 and the maximum tax rate (36%) is now applied to lump sums exceeding R1.05-million (previously R900 000).

All this caused much excitement. Some scurried to delay their retirement to after March 1.

The increase of the tax-free lump sum to R500 000 is worth a once-in-a lifetime R33 300. That’s nice to have — but hardly a dent in the context of building a financial plan to survive 20 years in retirement.

By contrast, the collections from dividends tax are R6-billion short of the budgeted R23-billion. The main problem here is that the Treasury has perhaps underestimated the extent of the dividend tax exemption granted to retirement funds.

If this is coupled with the abolition of retirement funds tax, the total tax exemptions granted to retirement funds are estimated to cost the government in the region of R20-billion a year. Then, of course, you need to add the cost of the tax savings granted on retirement fund contributions, which cost a further R10-billion per year.

The anomaly surrounding the increase in these thresholds encourages the taxpayer to leave the shelter of the tax-free haven of the retirement fund.

Even if a lump-sum payment is tax-free, it creates a tax exposure when the funds are spent or reinvested by the taxpayer to yield taxable income. And ultimately, when the taxpayer dies, whatever remains could be subject to estate duty at 20%.

Taxpayers are not getting the message regarding retirement funds. Lump sums are out, life annuities are in. You should keep your money in a retirement fund until it is needed. After all, where else can one find a tax-deductible tax haven today? Of course, life annuities are taxed, but at a lower rate in retirement.

So, if it’s true that no one can stop paying tax entirely, then at least you can rather pay tax on the never-never by delaying your withdrawal benefits as long as possible.

Lester is a professor at the Rhodes Business School, Grahamstown