Retiring from employment is not a single event, but rather a sequence of decisions that affects your cash flow, your tax outcomes, the structure of your retirement income, and the way your death benefits will be treated. When the sequence is wrong, we often see clients forced into avoidable tax, unnecessary product decisions, or a retirement income that is harder to sustain than it needed to be.

In the past three years, the biggest change to this process has been the introduction of the Two-Pot retirement system, effective 1 September 2024, which affects how retirement fund benefits are split and accessed. With that in mind, we have outlined the sequence we use in practice when guiding clients through retirement from their funds.

Step 1: Confirm what is triggering retirement in your case

Start by being clear whether you are: (a) retiring from employment and therefore forced to deal with an employer fund, or (b) choosing to retire from a retirement annuity (RA) or preservation fund because it suits your broader plan. If you are a member of an occupational fund (pension or provident), the fund rules will dictate your normal retirement age and whether late retirement is allowed. Your employer’s retirement date drives the timeline and the paperwork, even if you are not yet ready to draw income. If you are retiring from an RA or preservation fund, you generally control the timing from age 55 onwards, which allows far more tactical planning around tax year-end, cashflow needs, and sequencing of multiple fund retirements.

Step 2: Get the correct benefit statement and understand the 3 components

Before you decide anything, be sure to obtain an up-to-date benefit statement and confirm how your benefit is split. From 1 September 2024, many members will see three components reflected: a Vested Component, a Savings Component*, and a Retirement Component. Practically, this matters because each component has different access rules. The Vested Component broadly follows the rules that applied prior to 1 September 2024, while the Savings Component is designed for limited access, subject to the fund rules. Lastly, the Retirement Component is earmarked for retirement and must generally be used to purchase an annuity income.

Step 3: Plan the retirement date around tax and cash flow, not convenience

Once you understand what you are retiring from, you will need to decide when to retire based on two practical questions: (1) when do you actually need income, and (2) in which tax year do you want lump sums and annuity income to accrue? These are important decisions to get right because a retirement date late in a tax year can push your annuity income into an unfavourable tax bracket. On the other hand, delaying the start of annuity income until the new tax year can sometimes reduce the first-year tax burden, which is why it’s important to understand the rest of your income, including employment earnings, rental income, and interest.

Step 4: Decide on lump sum commutation only after running the tax numbers

At retirement, you will usually have a choice to commute a portion of your benefit as cash, subject to the rules of that fund and the nature of the benefit, bearing in mind that lump sums on retirement are taxed on the retirement lump sum tax table, where the first R550 000 is currently taxed at 0%, with higher bands applying above that. The critical point is that these tax tables are applied on an aggregated basis over your lifetime, meaning that all retirement lump sums received, together with any severance benefits received on or after 1 March 2011, are taken into account collectively, and not assessed separately per fund.

The Two-Pot framework adds another layer in that any amount paid from the Savings Component at retirement is generally taxed on the retirement lump sum benefit table as well, and clients should assume that SARS will view the retirement lump sums holistically. From a practical perspective, it’s also important to keep in mind that withdrawals from the Savings Component before retirement are taxed at your marginal rate and not per the retirement lump sum table.

Step 5: If you are leaving an employer fund, choose your route in the right order

If you are retiring from an employer pension or provident fund, you typically face three broad routes, and the sequence matters:

• Defer within the employer fund (if the rules allow it): This option can be useful if you are not yet ready to draw income, although keep in mind that this usually limits you to the fund’s approved investment choices.
• Transfer on a tax-neutral basis to a preservation fund or RA (where appropriate): This is often considered where you want more investment flexibility, better consolidation, or a different platform – but be cognisant of the withdrawal rules pertaining to preservation funds.
• Retire directly (commute a lump sum and purchase an annuity): This is appropriate where you need income now, but be aware that this is the least reversible decision, so ensure that your tax modelling and cashflow planning are done meticulously before instruction forms are signed.

Step 6: Confirm the vested rights if your provident fund (where applicable)

Provident fund retirement remains an area where legacy rules still matter. In broad terms, provident fund annuitisation reforms have applied from 1 March 2021, but members who were 55 or older on 1 March 2021 and remained in the same provident fund may still be able to take their full benefit as cash at retirement (subject to tax). For those who were younger, vested rights on the pre-reform portion still need to be separated from the portion subject to annuitisation rules. This is important because it directly affects how much you can take in cash and how to plan taxes over time.

Step 7: Make the annuity decision with longevity and flexibility in mind

Once you know how much must be annuitised, you need to choose between a living annuity, a life annuity or a combination of the two. Most retirees consider a living annuity because it offers investment flexibility and beneficiary nomination flexibility, although keep in mind that this option requires disciplined drawdown management. Legislation prescribes that living annuity drawdowns must fall between 2.5% and 17.5% per year, with changes typically allowed on policy anniversary dates. On the other hand, a life annuity trades flexibility for certainty in that you are guaranteed a pre-determined income for life. Your advisor should do some careful scenario planning in helping you decide the most appropriate annuity income for your purposes.

Step 8: Align beneficiary nominations and estate planning before you retire

Before retirement, death benefits inside a retirement fund are distributed in terms of section 37C processes, meaning trustees consider dependants and nominees rather than simply following a Will. This means that, while your beneficiary nomination remains important, it is not the final instruction. After retirement, depending on the annuity structure, death benefit mechanics can change materially, and it is important to review your beneficiary nominations as part of the retirement sequence.

Step 9: Finalise the paperwork

The last step is signing instruction forms and setting implementation dates, including lump sum payment dates, annuity commencement dates, and income frequency. Remember, SARS directives, banking verification, and fund administrator turnaround times can all affect cash flow, and it is advisable to have a realistic transition plan that includes interim cash reserves.

As is evident from the above, retirement is not merely a form to be signed, but rather a set of interlinked decisions that are important to get right the first time. Since 2024, those decisions have become more layered because benefits can now sit across multiple components with different access rules. The key takeaway is that if you follow the right sequence, you can dramatically reduce the risk of expensive, irreversible mistakes, and you give your retirement income plan the best chance of succeeding.

Have a super day.

Sue

*Note that seed capital (up to 10% of the vested component, capped at R30 000) may have been transferred into the Savings Component, which means some members may have a savings balance even if they have not contributed under the new regime for long.