If you’re a government employee who started working before March 1998, there’s a fantastic tax-free benefit that you might not be fully aware of. Whether you decide to retire or resign, you could access a portion of your pension without paying any tax. Sounds amazing, right?
But here’s the catch: The exact amount of this benefit isn’t disclosed, and there’s no easy way to know if the calculation is accurate. Worse, what if SARS makes a mistake? Let me share a real story to highlight why this is so critical.
A Real-Life Example: A Mistake That Cost Over R200,000
A few months ago, I worked with a government employee who was calculating his pre-1998 tax-free benefit. Unfortunately, when SARS processed the payout, they made an error, and over 200,000 rands were wrongfully deducted in taxes.
Thankfully, I was able to spot the issue and help him recover every single cent. But what if you don’t understand how the pre-1998 benefit works? How can you ensure you get the full amount that’s rightfully yours?
What Is the Pre-1998 Tax-Free Benefit?
Let’s break this down clearly. If you started working as a government employee before March 1998, you qualify for a portion of your pension to be tax-free. But how does this benefit work?
Tax-Free Before and After March 1998
- Before March 1998: Any money you accumulated before this date is tax-free.
- After March 1998: Any money earned after this date will be taxable.
Here’s an example to help you understand:
- If you started working in March 1988, your first 10 years (1988-1998) are tax-free. The money accumulated after 1998 is taxable.
Calculating Your Tax-Free Benefit: Let’s Simplify
To make things clearer, let’s assume you started working in March 1988, and you’ve worked for a total of 40 years (10 years before 1998 and 30 years after). The breakdown is as follows:
- 10 years before 1998: This portion is tax-free.
- 30 years after 1998: This portion is taxable.
The total number of years you’ve worked is important because it directly affects how much of your pension is tax-free.
The Key to Paying Less Tax: Flexibility
Flexibility is critical when minimizing the tax you’ll pay on your pension payout. Here’s why:
- More money taken as a lump sum or income = higher tax.
- Less money taken = lower tax.
But how do you decide how much to take? Here are a few things to consider:
- How much do you actually need?
- Do you have any debt or other financial obligations?
Here’s a quick example to demonstrate the flexibility:
- If your pre-1998 tax-free benefit is 1 million rand and your lump sum gratuity is 1.5 million rand, you’ll only pay tax on the amount above the 1 million rand.
- Adjusting the amount you take (for example, withdrawing 750,000 rand) ensures that you stay below the tax threshold, paying less tax.
Why You Need a Tax Specialist
Tax laws can be complex, and mistakes can be costly. That’s why it’s essential to have a tax specialist on your side. A tax specialist can:
- Calculate your pre-1998 tax-free benefit accurately.
- Plan your tax strategy well in advance.
- Ensure accountability—if something goes wrong, they take responsibility.
Without a tax specialist, you’ll be left to figure it out on your own. But if you make a mistake, there’s no turning back.
What If SARS Makes a Mistake?
Let’s face it: mistakes happen, especially with SARS. If a calculation error occurs on your pre-1998 benefit, it can be difficult to correct.
Once SARS issues a tax directive, it’s typically final. They’ll withhold the tax, and it’s your responsibility to challenge the mistake. But this is where a tax specialist can really help you:
- They’ll advocate for you and help you recover any wrongly deducted tax.
- They will ensure you are fully compensated if an error occurs.
Remember: once the tax is deducted, it’s almost impossible to recover it unless you’ve done your planning and calculations right from the start.
Maximizing Your Pre-1998 Tax-Free Benefit
Once SARS issues the tax directive, there’s no going back. That’s why it’s crucial to make sure everything is calculated correctly from the outset. For example:
- If you have a 1 million rand tax-free benefit but only use 800,000 rand, you’ll lose the remaining 200,000 rand forever. It’s not like a rollover that you can claim in the future.
To avoid this, ensure you maximize your pre-1998 benefit from the start.
Final Thoughts: Take Control of Your Future
Understanding the pre-1998 tax-free benefit is vital for ensuring that you don’t overpay in tax and that you protect your hard-earned money. With the right planning, calculations, and expert advice, you can make sure that you keep more of your pension and pay less tax.
If you’re unsure about how this works or feel overwhelmed, don’t hesitate to get in touch with a tax specialist. They’ll guide you through the process, protect you from mistakes, and ensure that you maximize your retirement benefits.
Disclaimer:
Retirement Wellness SA is an Authorised Financial Services Provider – FSP 31609. This video provides information, not advice.
Disclaimer: This information is not provided by or on behalf of the Government Employees Pension Fund (GEPF). We do not act on behalf of the GEPF.
