Planning for retirement is one of the biggest financial responsibilities in life. But when the time finally comes to receive your lump sum benefit from a retirement fund, many people get confused about how it is taxed. Understanding the tax rules can help you avoid surprises and even save money.
In this article, you’ll learn how lump sum benefits are taxed, what exemptions apply, how SARS calculates the tax, and smart tips to reduce your tax liability.
What Is a Lump Sum Benefit?
A lump sum benefit is a once-off withdrawal you receive from a retirement fund, such as:
- Pension fund
- Provident fund
- Retirement annuity (RA)
- Pension preservation or provident preservation fund
You receive this lump sum either at retirement, on withdrawal, or in cases like death or severance.
Each type of lump sum has different tax treatment, which we explain below.
Types of Lump Sum Benefits and Their Tax Treatment
✅ 1. Retirement Lump Sum (At Retirement or After Age 55)
When you retire, your retirement fund allows you to take a portion as a lump sum. SARS taxes this amount using a preferential tax table, which is much lower than normal income tax.
Retirement lump sum tax table (example structure):
| Lump Sum Amount | Tax Rate |
|---|---|
| 0 – R550,000 | 0% (tax-free) |
| R550,001 – R770,000 | 18% of amount above R550,000 |
| R770,001 – R1,155,000 | R39,600 + 27% of amount above R770,000 |
| Above R1,155,000 | R143,550 + 36% of amount above R1,155,000 |
Note: The tax brackets are cumulative. SARS adds all previous lump sums you ever received to calculate your new tax.
✅ 2. Withdrawal Lump Sum (Resignation, Retrenchment, Job Change)
If you withdraw before retirement, the tax is higher.
Withdrawal lump sum tax table (general example):
| Lump Sum Amount | Tax Rate |
|---|---|
| 0 – R25,000 | 0% |
| R25,001 – R660,000 | 18% of amount above R25,000 |
| R660,001 – R990,000 | R114,300 + 27% above R660,000 |
| Above R990,000 | R203,400 + 36% above R990,000 |
So withdrawing early is usually disadvantageous because:
- You lose compound growth
- You pay higher tax
- It reduces retirement savings
✅ 3. Severance Benefits (If You Lose Your Job Through No Fault of Your Own)
If you receive a severance package, it is usually taxed like a retirement lump sum, not a withdrawal lump sum.
This is beneficial because:
- You get the larger R550,000 tax-free portion
- The entire lump sum is taxed at lower rates
✅ 4. Lump Sum Paid on Death
If a member passes away, beneficiaries can receive:
- A lump sum
- An annuity
- Or a combination
Tax applies under the retirement lump sum tax table (more favorable). Beneficiaries do not pay normal income tax on this amount.
How SARS Calculates Tax on Lump Sums
SARS uses something called the cumulative approach:
- SARS checks all taxable lump sums you received in your lifetime.
- It adds the new lump sum to previous ones.
- It applies the tax table to the total.
- It subtracts what you have already paid.
This method prevents people from splitting benefits to pay less tax.
Factors That Affect Your Tax on Lump Sums
🔹 1. Your previous withdrawals
If you withdrew money earlier in life, your tax-free portion reduces.
🔹 2. The type of retirement fund
Different funds have slightly different rules.
🔹 3. Your retirement age
Taking money early increases tax.
🔹 4. Whether it’s a retirement lump sum or withdrawal lump sum
Retirement lump sums always get better tax treatment.
Can You Reduce Tax on Your Lump Sum?
✔ 1. Avoid withdrawing before retirement
This keeps your tax-free portion intact.
✔ 2. Transfer to another retirement fund (Preserve your savings)
A tax-free transfer prevents you from losing money to penalties.
✔ 3. Take a smaller lump sum and use the rest to buy an annuity
Annuity income may be taxed at lower brackets over time.
✔ 4. Delay retirement if possible
More contributions = more growth + better tax position.
✔ 5. Use a financial advisor
A retirement planner can help legally reduce tax using structured withdrawals.
Example (Easy to Understand)
Example:
Sarah retires with a R700,000 lump sum.
- First R550,000 = tax-free
- Remaining R150,000 is taxed at 18%
- Tax = R27,000
- She receives R673,000 in hand
If she had taken earlier withdrawals, her tax-free portion might have reduced.
Frequently Asked Questions (FAQ)
1. Is my entire retirement lump sum taxable?
No. A portion is always tax-free depending on the SARS retirement tax table.
2. Can I withdraw all my funds before retirement?
Yes, but it is taxed heavily under withdrawal tax tables.
3. Are death benefits taxable?
Yes, but under the more favorable retirement lump sum tax tables.
4. Do I pay tax again on money transferred to a preservation fund?
No. Transfers done correctly are tax-free.
5. Who deducts the tax?
Your retirement fund administrator deducts it before paying you.
