Tax on a Preservation Fund Withdrawal in South Africa

Moving your retirement savings into a preservation fund is tax-free, but taking cash out of it before retirement is taxed on the SARS pre-retirement withdrawal table. On that table the first R27,500 you have ever withdrawn is taxed at 0%, and amounts above that are taxed at 18%, 27% and 36% in rising bands. The catch that surprises people is that the R27,500 tax-free slice is a once-off lifetime figure, not a fresh allowance each time, and it is shared across every fund you have drawn a withdrawal from since March 2009.

Two separate things are happening here, and the tax treatment is opposite for each. Transferring money in is neutral. Cashing money out is taxed.

The transfer in is tax-free

When you resign or are retrenched and move your pension or provident fund benefit into a preservation fund, that transfer is not taxed. Paragraph 6A of the Second Schedule to the Income Tax Act treats the full amount transferred into a preservation fund or retirement annuity as a deduction, so the transfer happens on a tax-neutral basis. The fund still applies to SARS for a tax directive, but the directive reflects the transfer at nil tax. You keep the whole benefit working for retirement, with nothing lost to tax on the way in.

Cashing out is taxed on the withdrawal table

A pre-retirement withdrawal is a different event. It is taxed on the withdrawal lump sum benefit table, which is harsher than the table used at retirement:

Taxable lump sum	Tax
R0 – R27,500	0%
R27,501 – R726,000	18% of the amount above R27,500
R726,001 – R1,089,000	R125,730 + 27% of the amount above R726,000
R1,089,001 and above	R223,740 + 36% of the amount above R1,089,000

This is not the retirement table with the R550,000 tax-free band. That better table only applies when you retire from the fund. Take the money early and you use this one, where the tax-free portion is just R27,500.

The tax is also worked out on a cumulative basis. SARS adds up all the withdrawal lump sums you have taken since March 2009, taxes the running total on the table, and subtracts the tax already charged on earlier withdrawals. The result is that your first withdrawal uses up the R27,500 zero band and the lower 18% band, and later withdrawals are taxed higher because the low bands are already gone. The R27,500 is a lifetime amount you only get once.

The one withdrawal a preservation fund allows

What sets a preservation fund apart from a retirement annuity is that it has historically let you take one withdrawal from your preserved benefit before retirement, either the full amount or part of it. That single pre-retirement withdrawal is the amount taxed on the table above. Since 1 September 2024 the two-pot retirement system changed the mechanics for new contributions, splitting them into a savings component you can access annually, taxed as set out in two-pot retirement withdrawal tax, and a retirement component locked until retirement, while the benefit you preserved before that date keeps its existing rules. Check your fund rules for exactly what you may take and when, because the tax on any amount you do withdraw follows the table above.

What a R300,000 withdrawal costs

Someone leaves a job, preserves their R600,000 pension benefit in a preservation fund with no tax, then a year later needs cash and withdraws R300,000 from it. They have never taken a retirement or withdrawal lump sum before, so the full R27,500 zero band is available.

Tax: the R300,000 falls in the R27,501 to R726,000 band, taxed at 18% of the amount above R27,500.

R300,000 - R27,500 = R272,500.

R272,500 x 18% = R49,050.

So R49,050 goes to SARS and they receive R250,950. Had they left the money untouched until retirement, the first R550,000 of a retirement lump sum would have been taxed at 0%, so the withdrawal cost them R49,050 in tax that a retirement benefit would not have. You can see the retirement side in the guide to tax on a retirement or provident fund withdrawal and model a lump sum in the retirement lump sum calculator.