Tax on a retirement lump sum in South Africa depends entirely on why you’re taking the money. Retire or get retrenched, and the first R550,000 is tax-free for the 2026 tax year (1 March 2025 to 28 February 2026), with gentler rates above that. Resign and cash out, and only the first R27,500 escapes tax before an 18% rate kicks in. Every lump sum you have ever received feeds into one lifetime running total, so the tax-free threshold is not a fresh allowance each time.1South African Revenue Service. Retirement Lump Sum Benefits
Rates for Retirement and Severance Lump Sums
SARS confirmed no changes to the retirement lump sum tax table for the 2026 tax year. The rates apply to the cumulative total of all retirement and severance lump sums received in your lifetime:1South African Revenue Service. Retirement Lump Sum Benefits
- R1 to R550,000: no tax
- R550,001 to R770,000: 18% on the amount above R550,000
- R770,001 to R1,155,000: R39,600 plus 27% on the amount above R770,000
- R1,155,001 and above: R143,550 plus 36% on the amount above R1,155,000
A retiree taking a R900,000 lump sum with no previous payouts pays nothing on the first R550,000, then 18% on the next R220,000 (R39,600), then 27% on the remaining R130,000 (R35,100). Total tax: R74,700, or roughly 8.3% of the gross. That is well below what ordinary marginal income tax would take from the same amount.
Rates for Withdrawal on Resignation
Cashing out because you resigned puts you on a very different table for the 2026 tax year:2National Treasury. Budget 2026 Tax Guide
- R1 to R27,500: no tax
- R27,501 to R726,000: 18% on the amount above R27,500
- R726,001 to R1,089,000: R125,730 plus 27% on the amount above R726,000
- R1,089,001 and above: R223,740 plus 36% on the amount above R1,089,000
The gap is deliberate. Someone withdrawing R550,000 on resignation pays 18% on R522,500, a tax bill of R94,050. A retiree taking the same R550,000 pays nothing. The system penalises early cash-outs to keep retirement savings intact.
SARS classifies retirement, death, retrenchment, reaching age 55, and permanent disability as reasons that qualify for the retirement (favourable) table. Any other exit reason, resignation being the common one, falls under the withdrawal table. Your fund administrator reports the reason to SARS. You don’t get to choose which table applies.1South African Revenue Service. Retirement Lump Sum Benefits
Every Previous Payout Counts
The lifetime aggregation rule catches more people than any other feature of the system. When you receive a new lump sum, SARS adds it to every retirement fund lump sum, withdrawal, and severance payout you have ever received. It then applies the table to that combined total and subtracts tax you already paid on the earlier payouts. You pay the difference.1South African Revenue Service. Retirement Lump Sum Benefits
Suppose you withdrew R300,000 when you left a previous employer and paid the withdrawal tax at the time. You retire years later and take a R550,000 lump sum. SARS does not treat that R550,000 as a fresh payout. It calculates tax on R850,000 combined, then credits what you already paid on the R300,000. The R550,000 tax-free band was partially consumed by the earlier withdrawal, and the new payout sits in a higher bracket than it would have on its own.3South African Revenue Service. Tax and Retirement
People who changed jobs several times and took cash each time often arrive at retirement expecting the full R550,000 tax-free band, only to find most of it was used up years ago.
You Can Only Take One-Third at Retirement
A common misconception is that your entire retirement fund is available as cash when you stop working. It isn’t. At retirement, the maximum you may take as a lump sum is one-third of the fund balance. The remaining two-thirds must be used to buy an annuity that pays you a regular income. The only exception is when your total retirement interest in the fund is R247,500 or less, in which case you can take the full amount as a lump sum.3South African Revenue Service. Tax and Retirement
The one-third lump sum is taxed on the retirement table above. The two-thirds used to buy the annuity is not taxed at that point, but the monthly income it later pays you is taxed as ordinary income at your marginal rate. That second layer of tax is easy to overlook when you focus only on the lump sum figure.
When Severance Pay Gets the Favourable Table
Severance pay only gets taxed on the retirement lump sum table when specific conditions are met. Your employment must have ended because the employer stopped trading or planned to, the employer carried out a general staff reduction, you reached age 55, or you became permanently unable to work due to illness, injury, or disability.4South African Revenue Service. Tax and Retrenchment
Two disqualifiers to watch. If you held more than 5% of the shares or member’s interest in the company paying the severance, you don’t qualify. And leave pay, notice pay, and pro-rata bonuses paid alongside a severance package aren’t part of the severance benefit. Those amounts are taxed as ordinary income at your normal marginal rate.
Two-Pot Withdrawals Are Taxed Differently
Since 1 September 2024, South African retirement funds have operated under a three-component structure: a savings component (one-third of new contributions, accessible once per tax year without resigning), a retirement component (the other two-thirds, locked until retirement), and a vested component holding everything accumulated before that date under the old rules.5South African Revenue Service. Two-Pot Retirement System
A savings component withdrawal is not taxed on the lump sum tables. SARS taxes it at your marginal income tax rate. The withdrawal is added to your other taxable income for the year. Earn R400,000 in salary and withdraw R50,000 from your savings pot, and you pay income tax on R450,000. SARS estimates the tax when issuing the directive; the final figure is settled when you file your annual return.
Three things to know before you apply. SARS will not issue a tax directive if you have outstanding tax returns, so file everything first. If you owe SARS money, the debt is deducted from your withdrawal before you receive anything, unless you already have a formal payment arrangement. And once your fund submits the application, the decision is final and cannot be reversed.
Protecting Your Tax-Free Threshold
If you resign and don’t need the cash immediately, transferring to a preservation fund avoids the withdrawal tax entirely. A transfer from a pension fund to a pension preservation fund, or from a provident fund to a provident preservation fund, does not trigger tax. The money keeps growing and is only taxed when you eventually take a lump sum or draw an annuity from it.
This is the most effective way to protect your R550,000 lifetime tax-free threshold for actual retirement. Every rand cashed out on resignation eats into that threshold and gets taxed at the harsher withdrawal rates. A preservation transfer costs nothing in tax and keeps the full retirement table available for later.
How the Money Actually Reaches You
No retirement fund payout reaches your bank account without a tax directive from SARS, which tells the fund exactly how much tax to withhold. Only your employer, fund administrator, or insurer can request the directive. You cannot apply for one yourself.6South African Revenue Service. I Want to Get a Tax Directive
The administrator submits the application through SARS eFiling, providing your personal details, income tax reference number, annual income, and the gross lump sum. SARS cross-references your lifetime payout history, calculates the tax, and issues the directive. The administrator deducts the tax, pays you the net amount, and issues an IRP5 tax certificate you’ll need when filing your annual return.7South African Revenue Service. Guide to Complete the Lump Sum Tax Directive Application Forms
The directive tax is an estimate based on what SARS knows at the time. Your actual liability is finalised on your annual return. If too much was withheld, you get a refund. If too little was withheld, which can happen when SARS didn’t have full records of your prior lump sums, you owe the difference.