Ask the experts: How should I invest my pension fund payout?

I will be retrenched in the next few months. My company will pay me a package of three months’ salary and my pension fund. How should I invest this and is there any tax relief for people who have been retrenched?

Jenny Gordon, senior legal adviser at Old Mutual Personal Finance Marketing, replies:

There are two tax issues: taxation of the pension fund benefit, and taxation of the three months’ salary that will be paid as a lump sum.

Under the Income Tax Act, on retrenchment, a person is entitled to a termination-of-service lump sum benefit of up to R30 000 tax free.

This applies once in a lifetime.

If the amount exceeds R30 000, the balance is taxed at the employee’s average rate of tax.

In terms of the rules of a pension fund, members might be entitled to early retirement, depending on age. On retrenchment, one is entitled to one of four options:

• Take the withdrawal benefit in cash, R1 800 of which will be tax free. The balance will be taxed at the average rate of tax. This is not recommended unless the member desperately needs funds.

• The member can preserve the withdrawal benefit in a pension preservation fund if the employer is a member of the preservation fund.

  The funds will then be transferred tax free. The member is entitled to one taxable withdrawal before 55, whereafter the person may retire from the fund.

• The member can transfer the withdrawal benefit tax free to a retirement annuity fund.

• The member can split the withdrawal benefit between a retirement annuity fund and a preservation fund.

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