Your decision to take a cash commutation should be a strategic one

Upon retiring from a retirement fund, you have the option to take a lump sum withdrawal of one-third the value of the fund in the case of pension funds and retirement annuities, and potentially more in the case of provident funds depending on when your funds vested. As announced in the latest budget speech, the tax tables for lump sum withdrawals from retirement funds have been amended for the 2023/2024 tax year (see table below) – with a notable change being that the tax-free withdrawal amount has increased from R500 000 to R550 000. While this is good news for those approaching retirement, our advice is to ensure that any cash commutations are carefully considered as part of your broader financial plan. Here are some factors to consider:

Previous lump sum withdrawals

What is important to keep in mind when it comes to the tax-free lump sum withdrawal is that tax is applied as an aggregate across all retirement funds and not per withdrawal. This means that if you have made previous cash withdrawals – including those made in respect of severance benefits – keep in mind that tax will be calculated on the cumulative amounts. As such, if you have made previous withdrawals, it is important to take these into account when making a decision to make another withdrawal. Further, if you have withdrawn your R500 000 tax-free portion prior to 1 March 2023, note that you will now have additional R50 000 available to withdraw tax-free – assuming you have other retirement funds in place. Remember, it is important to take a long-term view when it comes to reducing your tax liability. While withdrawing a lump sum at a tax rate of 18%, 27% or even 36% may seem favourable in contrast to one’s income being taxed at a marginal rate of 45%, keep in mind that the marginal income tax payable on living annuity income is deferred to when the income is drawn. To be absolutely sure of the tax implications of making a lumpsum withdrawal, our advice is to request a tax simulation from your retirement fund service provider – keeping in mind that you may have forgotten about previous withdrawals or severance benefits.

Capital needs in retirement

Before retiring, it is important to carefully assess your capital needs – both at the point of retirement and into the future. Remember, you are not permitted to make lump sum withdrawals from a life annuity or living annuity, so consider carefully whether you may need access to lumpsum capital – especially when it comes to high-cost items such as overseas travel, home renovations or modification, large medical appliances not covered by medical aid, or wedding costs. Your debt is another factor that should be taken into account when deciding on a lumpsum withdrawal. Before retiring, it is advisable to ensure that all debt is settled as it does not make sense to use your retirement income to service debt.

The composition of your investment portfolio

The composition of your overall investment portfolio is a significant factor in determining the level at which to withdraw from your fund, in particular the proportional split between compulsory and discretionary money. If the majority of your portfolio is housed in compulsory retirement funding investments, you may want to consider withdrawing a lump sum to invest in a discretionary portfolio so as to diversify across investment types, provide draw-down flexibility, allow for access to emergency capital, and provide for cashflow needs later in retirement. In the absence of any discretionary funds, having all your capital housed in either a life or living annuity, or a combination of both, can limit your access to funds going forward.

Nature of your annuity income

The type of annuity that you intend to put in place will also have bearing on your decision to make a lump sum withdrawal upon formal retirement. While living annuities provide some draw-down flexibility, life annuities are fairly inflexible in that the policyholder will receive a pre-determined income for the remainder of her life subject to the annual escalation increases (if any) agreed to when taking out the policy. This means that if the income from your life annuity does not keep pace with inflation and/or the purchasing power of your income loses value over time, you may need access to discretionary funds to supplement your retirement income. If you’re going to draw your retirement income from a living annuity, you have some flexibility in that you are permitted to draw down between 2.5% and 17.5% of the residual value of the investment per year. Where your drawdown rate is such that it erodes the value of your investment over time, you will eventually be drawing down from a diminishing pool of money, and you may need to supplement your income by drawing down from a discretionary pool of money.

Estate Planning

Your decision to make a lump sum withdrawal should not be considered separate from your estate planning needs, particularly when it comes to estate liquidity. Remember, a life annuity dies with the policyholder meaning that there will be no asset left to provide for the liquidity needs of the estate. As such, when considering whether to make a cash commutation, be sure to calculate the liquidity in your estate, keeping in mind that if any shortfalls exist you may want to consider employing a lump sum for these purposes.

Other retirement funds

Another factor to consider is whether you will have any future opportunities to take a lump sum withdrawal if the need arises. If you are retiring from a fund and have no other retirement funds in place, keep in mind that there will be no other opportunity to withdraw a large amount of capital and you will need to provide accordingly. However, if you have other retirement funds from which you intend to retire at a later date, bear in mind that there will be other opportunities to take a cash commutation.

Investment risk

If you choose to invest your lump sum withdrawal, keep in mind that those funds will be subject to investment risk which, in turn, may affect the income you are able to draw from the investment. On the other, if you choose to use the full fund value to purchase a life annuity, all investment risk is passed to the insurer, and you will be guaranteed an income for life regardless of what happens to the markets.


Should you choose to invest your lump sum cash amount into a discretionary investment to supplement your retirement income later on, be sure to understand the tax implications of drawing down from this investment, taking into account all other sources of income that you may have – including, but not limited to, annuity, rental and interest income. That said, be careful of drawing too little from your compulsory investments in an attempt to reduce your tax liability as this may result in you depleting your discretionary reserves prematurely. While this strategy may result in short-term tax savings, it may unintentionally result in you having to draw all your retirement income from your compulsory funds later in retirement which, in turn, could result in you paying higher taxes over the longer term.

The above article is intended to create awareness of the multi-faceted and technical nature of planning for retirement, and the many factors that need to be considered holistically when taking decisions such as commuting a portion of one’s retirement fund.

Retirement withdrawal tax tables applicable 1 March 2023

Taxable income (R) ​Rate of tax 
1 – 550 000 0% of taxable income
550 001 – 770 000 18% of taxable income above 550 000
770 001 – 1 155 000 39 600 + 27% of taxable income above 770 000
1 155 001 and above 143 550 + 36% of taxable income above 1 155 000

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