Tax on Divorce Pension Payout​ – Guide

In South Africa, when you receive a divorce pension payout, it’s important to understand the tax implications. According to the Pension Funds Act and the Income Tax Act, divorce settlements involving pension funds are subject to taxation, but the tax burden falls on the recipient of the pension payout, not the member of the pension fund.

Here are the key facts:

1. Taxable as a Lump Sum Withdrawal

When you receive a pension payout as part of a divorce settlement, it is treated as a lump sum withdrawal from a pension fund. The payout will be taxed according to the SARS withdrawal tax tables, which are the same tables used when someone retires or withdraws from a pension fund early.

2. Tax Rates for Pension Divorce Payouts

The tax rates for lump sum withdrawals are based on the total amount being paid out. As of the most recent tax laws, the tax rates are:

• R0 to R27,500: 0% tax (this portion is tax-free).
• R27,501 to R726,000: 18% tax on the amount above R27,500.
• R726,001 to R1,155,000: 27% tax on the amount above R726,000.
• R1,155,001 and above: 36% tax on the amount above R1,155,000.

3. Example Calculation

If you are awarded R500,000 from your ex-spouse’s pension fund as part of a divorce settlement, the tax would be calculated as follows:

• The first R27,500 is tax-free.
• The remaining R472,500 would be taxed at 18%, which equals R85,050.
• Therefore, your total tax payable would be R85,050, and you would receive R414,950 after tax.

4. Tax Deduction by Pension Fund

The pension fund administrator will deduct the tax before paying out the lump sum to you. You will receive the net amount (after tax) in your bank account, and the pension fund will issue you with an IRP5 tax certificate, reflecting the tax paid on your behalf.

5. Deferred Option to Avoid Immediate Taxation

Instead of taking the pension payout as cash, you can opt to transfer the divorce payout to your own retirement fund. This will allow you to avoid immediate taxation on the lump sum and only pay tax upon retirement or when you eventually withdraw the funds.

6. No Tax for Non-Member Spouse on Transfers

If you choose to transfer the payout to a preservation fund, retirement annuity, or another pension fund, you will not be taxed immediately. The taxation will occur only when you withdraw the money from the retirement fund in the future.

7. Legal Advice is Crucial

It’s always best to seek advice from a tax advisor or financial planner when dealing with a divorce pension payout. They can help you understand how the tax will impact your specific payout and advise on whether a transfer to a retirement fund might be a better option to defer taxes.

For more details on divorce pension payouts and tax implications, you can visit the SARS website or consult legal experts specialised in divorce and tax.