Calculate your tax on a pension withdrawal
Every year, hundreds of thousands of South Africans change jobs — and most of them face the same question: what do I do with my pension fund? The decision feels simple (take the cash or leave it) but the tax implications are anything but. Getting this wrong is one of the most expensive financial mistakes a South African employee can make.
This guide explains the tax treatment for pension fund withdrawals at every stage — resignation, retrenchment, and retirement — with specific rand examples so you know exactly what SARS takes and what you keep.
The Two Tax Tables: Before vs At Retirement
SARS applies completely different tax rules depending on when you withdraw. Pre-retirement withdrawals (when you resign or are retrenched) are taxed far more harshly than withdrawals at retirement. This difference is deliberate — it's designed to discourage people from cashing out their pension every time they change jobs.
| Scenario | First Tax-Free Amount | Why It Matters |
|---|---|---|
| Resignation (pre-retirement) | R27,500 tax-free | Much lower exemption — most of the cash gets taxed |
| Retrenchment (pre-retirement) | R27,500 tax-free (pension) + R500,000 (retrenchment package) | Retrenchment package has separate better treatment |
| Retirement (age 55+) | R550,000 tax-free lump sum | Far more generous — preserve as much as possible for here |
Pre-Retirement Withdrawal Tax: The Resignation Table
If you resign and take your pension as cash, SARS applies the lump sum withdrawal tax table. This is the expensive table — and the one that catches most people off guard.
| Withdrawal Amount | Tax Rate | Cumulative Tax |
|---|---|---|
| First R27,500 | 0% — tax free | R0 |
| R27,501 – R726,000 | 18% on this portion | Max R125,325 |
| R726,001 – R1,089,000 | 27% on this portion | Max R223,335 |
| Above R1,089,000 | 36% on this portion | — |
Real example: You resign after 8 years and your pension fund balance is R180,000. You decide to take the cash. Tax calculation: R27,500 = tax free. Remaining R152,500 × 18% = R27,450. You receive R152,550. SARS keeps R27,450 — 15.3% of your total balance.
That's the best-case scenario. Someone with a R500,000 pension cashing out pays: R27,500 tax-free + R472,500 × 18% = R85,050 in tax. They receive R414,950 but the money that left their fund would have grown to over R2 million at retirement at 9% over 20 years.
⚠️ The R27,500 lifetime exemption is cumulative across ALL your pre-retirement withdrawals throughout your working career. If you took R15,000 tax-free when you resigned from your first job, you only have R12,500 left of the exemption for future pre-retirement withdrawals. SARS tracks this on your tax record.
The Retirement Lump Sum: The Good Table
At retirement (from age 55 for most funds), you can take a portion of your fund as a cash lump sum — and SARS is far more generous here. The first R550,000 is completely tax-free.
| Retirement Lump Sum | Tax Rate |
|---|---|
| First R550,000 | 0% — completely tax-free |
| R550,001 – R770,000 | 18% on the excess above R550,000 |
| R770,001 – R1,155,000 | 27% on the excess above R770,000 |
| Above R1,155,000 | 36% on the excess above R1,155,000 |
The R550,000 is a lifetime limit. SARS deducts any previous pre-retirement cash withdrawals from your lifetime tax-free allowance. If you cashed out R180,000 on a resignation 10 years ago (using R27,500 of exemption), your remaining retirement exemption is R550,000 minus the taxable portion of that previous withdrawal — SARS calculates this precisely when you retire.
💡 Preserving your pension when changing jobs doesn't just save tax — it protects your lifetime R550,000 tax-free retirement allowance from being eroded. Every rand you cash out before retirement reduces the exemption available at the most important financial event of your life.
What to Do When You Change Jobs
You have four options when you leave an employer and have a pension fund balance:
Option 1 — Transfer to a preservation fund. A tax-free transfer that holds your money in a dedicated retirement environment. You get one partial withdrawal before retirement. Best for most people — zero tax, full compound growth maintained, one emergency access if desperate.
Option 2 — Transfer to your new employer's pension or provident fund. Tax-free transfer. Your retirement savings continue in the same tax-free growth environment. Simple and clean if your new employer's fund has reasonable fees and investment options.
Option 3 — Transfer to a retirement annuity. Tax-free transfer to a personal retirement annuity with a registered insurer or investment platform. Gives you more control over investment choices. No early access except under the two-pot system's savings component rules.
Option 4 — Take the cash. The most expensive option. Immediate tax at the pre-retirement table, loss of all future compound growth, reduction of your lifetime R550,000 retirement exemption. Only advisable in a genuine financial emergency where all other options are exhausted.
Retrenchment and Your Pension: Two Separate Calculations
This is where most retrenched workers get confused — and sometimes get undertaxed at source, leading to a nasty bill later. Your retrenchment package and your pension fund withdrawal are calculated separately by SARS.
Your retrenchment package (severance pay, notice pay, leave pay) uses the retirement lump sum tax table — the first R500,000 is tax-free. Your pension fund if cashed out simultaneously uses the pre-retirement withdrawal table — only R27,500 tax-free. Two separate events, two separate calculations, both on the same tax year's assessment.
The combined tax bill on both events in the same year can push you into a significantly higher effective rate. A retrenched employee receiving a R300,000 package plus cashing out a R250,000 pension in the same tax year needs both calculated carefully — ideally by a tax practitioner — to avoid unexpected SARS debt.
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The tax on pension fund withdrawals in South Africa depends on whether you're withdrawing at retirement or before retirement. Before retirement (on resignation or retrenchment): the first R27,500 is tax-free, then 18% up to R726,000, 27% from R726,001 to R1,089,000, and 36% above that. At retirement: the first R550,000 is tax-free, with more favourable rates above that.
At retirement, you have two options for your pension fund: take a cash lump sum (subject to the retirement lump sum tax table — first R550,000 tax-free) or convert to an annuity (monthly income for life). Most pension funds require that at least two-thirds of the fund is converted to an annuity if the total is above R165,000. The annuity income is then taxed as ordinary income.
When you resign, you can: transfer your pension to a preservation fund or your new employer's fund (no tax, no loss), transfer to a retirement annuity (no tax), or take a cash payout. The cash payout is taxed using the lump sum withdrawal tax table — first R27,500 tax-free. Many financial advisers strongly recommend preservation over cash withdrawal to avoid destroying your retirement savings.
Both resignation and retrenchment use the same lump sum withdrawal tax table (first R27,500 tax-free). However, retrenchment packages have a separate more generous tax exemption — the first R500,000 of the retrenchment package itself is tax-free. The pension fund withdrawal and the retrenchment package are taxed separately under different tables.
A preservation fund is a retirement fund specifically designed to hold your pension or provident fund money after you leave an employer. It preserves your retirement savings intact, maintains the tax-free growth environment, and delays the tax event until you retire. You're allowed one partial withdrawal from a preservation fund before retirement. Many banks and insurance companies offer them.
At retirement, the first R550,000 of any lump sum you take from your pension, provident, or retirement annuity fund is completely tax-free. This is a lifetime limit across all retirement funds and all retirement events. If you took a cash lump sum on a previous resignation, that amount is deducted from your R550,000 tax-free retirement allowance.
Outside of the two-pot system's savings component (which allows limited access), you can only access your pension fund before retirement by resigning, being retrenched, or your employer winding up. You cannot simply 'withdraw' from a pension fund while you're still employed at the same employer — you must exit employment first.
The best option for most people is to transfer to a preservation fund or your new employer's fund — both are tax-free transfers that maintain your retirement savings. Taking the cash payout is the most expensive option: you pay tax immediately, you lose all future compound growth on that money, and you reduce your lifetime R550,000 tax-free retirement allowance.
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→ Two-Pot Retirement SA 2026: Full Guide→ Retrenchment SA 2026: Rights and Payout→ Retirement Savings South Africa: Are You on Track?→ TFSA South Africa: The Complete Guide→ Provisional Tax SA 2026: Who Pays and When→ SA Tax Brackets 2026: Full Guide