No Tax on Pension Funds - Announcement SA Budget 2007

[jaxmvr]

Hi there

I hope that there is a financial guru on the forum that will be able to help me . We have decided to cash in when I resign and take the Retirement Fund money. We will rather invest the little bit (with the exchange rate) in Australia.

With the Budget speech this week Trevor Manual said that the tax on Pension funds will fall away . Can anyone tell me if this is valid when you resign as well, or is it only when you actually go on Pension. I pray that the answer will be positive

[Guest EMMA]

Hi

As far as I understood from the budget speech, it is the tax the pensionfund itself paid on income received from investing your pensionfund that was abolished. Not the tax you pay when the pension is paid out. Or am I misunderstanding your question?

emma

[jaxmvr]

Hi

As far as I understood from the budget speech, it is the tax the pensionfund itself paid on income received from investing your pensionfund that was abolished. Not the tax you pay when the pension is paid out. Or am I misunderstanding your question?

emma

Hi Emma

You understood correctly. If this is right and they still deduct tax when they pay you out, that is bad news Surely when they do not pay tax on the income received from my investment I should also not pay tax. I am not very good with all this financial things , give me a computer any day

[Cindylou]

Up until now Retirement Funds have been required to pay tax on the interest and rental income they make on your savings - in other words the "profit" they are making is taxed. Under the new budget this "profit" will not be taxed which means that your investment with the Retirement Fund will grow at a greater rate.

Obviously Mr Manuel does not want you to withdraw your retirement funds as the government's aim is for you to provide for your old age as much as possible. That's why early withdrawals are discouraged and they will not give you a tax break on these withdrawals.

Cindylou

[starfish]

Hi

The tax which was abolished was the tax that the fund administrators paid on the returns made by the funds.

Here is an extract of a Budget 2007 summary my bank sent me:

"The scrapping of Retirement Fund Tax brings about relief in line with government's retirement funding reforms. Investors in retirement saving products should see an increase in the net yield of their investments which will result in an increase in capital payout at retirement. As a result of the scrapping of this tax, Pension Fund Trustees of defined contribution funds should pass this benefit to members by way of increased yields and on defined benefit funds by increasing the final benefit at retirement."

Regards,

Scott

[Pixi]

Also: when you made your monthly contributions to the pensionfund - you received a tax deduction - which the work calculated and brought into consideration, before they gave you your pay. So in your pensionfund is money which you could build-up with a tax 'advantage' , if you take the money,' Sars is going to ',disadvantage you and unfortunately you are going to pay tax.

[jaxmvr]

Thank you all so much for clarifying the matter for me. As I said, financials are not my strong point especially when it comes to tax. As long as you learn along the way, I always say.

[starfish]

So in your pensionfund is money which you could build-up with a tax 'advantage' , if you take the money,' Sars is going to ',disadvantage you and unfortunately you are going to pay tax.

Good point Pixi - so the question is - does one:

1. Cash in your pension, pay the tax on it, and get to to Australia

2. Leave it as a pension in S.A, thereby avoiding the tax, but gambling on the value of the Rand in 10 or 20 years time (look at the Zim $).

Regards,

Scott

[Cindylou]

Firstly that will depend on the rules of the particular investment vehicle, be it a pension or provident fund or an RA. Secondly, that's the sort of question that each person has to answer for themselves taking their investment risk profile into account.

Good luck whichever route you chose!

C

[Pixi]

Check the thread which Bells started on Provident funds- must warn you - their is no clear answer, but very good in getting you to think about your options!

[ocean3]

We have heard that you can transfer your pension funds to another in Aus. from a tax advisor, he did however appear unsure on that aspect so gave us another contact person to help us. I will post the answer when we have it. It would make sense that one could transfer a pension to another Country...after all it is a "global village".

[Pixi]

Ocean3 I'm surely looking forward to see what they gonna come up with! Please forward it - I'd love to see.

[ocean3]

One can tranfer your pension to a fund overseas. It's just not something that seems to be done that offen. My company broker has advised that I transfer my pension to a provident fund. After the tax year...of not having earnings in SA is up then you are taxed a lot less on the amount. This sounds like the best option to me at this stage. I would like to keep it in the provident fund for longer as it can double in 5 years and provided SA is still semi stable and the rand has not devalued too much one can end up taking a much healthier sum out. This is only my assumption...obviously the quicker one takes out funds from here the quicker you can start building something there...so there are pro and cons at every corner

[Pixi]

Thnx Ocean3

[TheBs]

jaxmvr

Just be careful of Retirement Annuity/Pension Fund

We have an RA and even if we cancel this in SA we can only access the capital amount at retirement age

[W+R]

I was thinking about these very issues today!

Please help me here:

If I quit my job and take the pension money, how much will I be taxed on it?

Will it just be considered the same as your salary within that tax year?

Any help appreciated.

Thanks

W

[Pixi]

Roughly you can work out your tax like this: take the year in which you resign and the previous year. Now work out your average rate out tax (without the pension) . To get your average rate of tax: take last years assesment and take normal net tax payable divide by taxable income and put it into a percentage. For this year you will find it is little more tricky, but basically you just take your tax payable divide by taxable income as what it would be if you worked for the whole year. Other words if you resign after say 5 months you have to take your salary divide by 5 and multiply by 12 to get the year equivalent. (They want s to prevent us from resigning end of March with only one months income) . Now the highest average of the two years is the amount on which you will get taxed for the pensionfund. You cannot pay lower than 18% , for normal salary people this normally works out around 27-30% .

[Pixi]

Just to clarify - you cannot resign 1 March and think the average for 1 day will be used - they annualise it. And they use average tax rate, not marginal. So to pay the 40% I''ve seen people say they pay, means those guys literrally have to earn millions and millions

Sorry for double posts - bit slow on to learn how to delete or modify

Edited March 15, 2007 by Pixi

[starfish]

Hi

My understanding is that if you resign and "cash-in" your pension money (i.e. do not reinvest it in another pension) it will be added to your taxable earnings for the financial year in which you resign. Therefore it is better to resign earlier in the tax year than later as there will be less monthly salary amounts to add to the pension amount.

You could roughly calculate your likely tax payable by adding the amount paid out by your pension to your gross earnings for the year, subtracting the allowable deductions (e.g. tax already paid for the year, the R1800 tax free deduction from your pension payout etc), and applying the net amount to the tax tables.

Earlier posts in this topic have indicated that it is permissable to transfer an S.A. pension to an offshore (i.e. Australian) one without having to pay tax. If this is the case it would be an advisable route to follow, since you'd avoid paying the tax.

Best is to discuss your own circumstances and requirements with a reputable (preferably indendant) financial advisor.

Regards,

Scott

I was thinking about these very issues today!

Please help me here:

If I quit my job and take the pension money, how much will I be taxed on it?

Will it just be considered the same as your salary within that tax year?

Any help appreciated.

Thanks

W

[shongololo]

Hi Everyone

I'm also looking for advise on this issue.

Regarding transferring your pension offshore, I was told that you could only transfer to a limited number of "approved" pension funds. You will of course have to pay admin charges to move your money to the new fund. If you move to a fund that is not approved, you will have to pay tax as you are deemed to be taking the money out of South Africa Don't know if I understood correctly. On top of that, there would still be the admin charges at the new fund. It doesn't seem worth it, so I'm considering just taking the knock, and parking the money in a high interest internet based account (or something similar) until I decide to buy a house. It would mean I start out with no pension/super, but at least I will be able to put down a big deposit on a house. Guess you can't have everything, sigh ....

Ocean3 mentioned moving their pension into a provident fund. I don't think that that is allowed as your pension contributions are deducted pre-tax, and provident fund is post tax-money. Are you sure that it wasn't a preservation fund, rather than a provident fund? With a preservation fund it could mean that your money is tied up until you are 50(?) years old. Bit of a gambe with the rand, that.

Regards

Shongololo

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