Avoid early pension payouts


NOTHING is certain except death and taxes, said Benjamin Franklin.

Had he lived today he might also have added that the tax laws seem to have become more complex.

As a result, most companies and many individuals need expert advice to meet their tax obligations. But who qualifies as a tax expert?

Eugene du Plessis, head of the tax department at PKF chartered accountants, says increased enforcement of tax laws has made it impossible for the average auditor to act as a tax specialist, since specialist knowledge is needed.

"This knowledge is needed to ensure not only that clients comply with their responsibilities, but also to ensure that they themselves do not fall foul of the law and are not held accountable for any non-compliance."

Du Plessis says adding value for clients through innovative and legal tax solutions is a challenge only the cream of the tax crop are able to meet.

Recently more amendments to SA's Income Tax Act have been introduced, or are being proposed. Changes to other acts - for example, the pension fund and divorce acts - have also affected the tax scenario.

For example, a divorced spouse can now be paid a lump sum from their ex-spouse's retirement fund, if this is part of the divorce settlement, without having to wait for them to retire.

Taken together, these changes have left hardly any of the old tax dispensation unaltered. We recommend that you seek professional advice before making significant financial decisions.

In these tough times, many are tempted to withdraw a lump sum from their retirement fund, perhaps to pay off debt. But the tax penalties are severe.

The first R300 000 of any lump sum retirement fund withdrawn at retirement is tax free.

But if the money is withdrawn early, only the first R22 500 will be tax-free and with the proposed tax amendments allowing for lump sums to be taxed on a cumulative basis, the early withdrawal could negatively affect the tax-free amount a well as the tax rates on actual retirement.

Tax will then be levied at a rate of 18percent for any further amount drawn up to R600 000, meaning that 18% tax will be levied on amounts between R22 500 and R300 000.

You should keep your retirement savings safe for your old age, when you need them most.

l The writer is a tax consultant and director at PKF Chartered Accountants.