Losing your job is stressful, and your retirement fund is often the only large sum of money in reach. Before you touch it, you need to know three things: how the way you leave changes the tax, what the two-pot system lets you take, and what a quick cash-out costs you later. This guide covers retrenchment first, then the other ways of leaving a fund early.
What You Will Learn
- What you are owed when you are retrenched, and what is a separate payout from your fund
- Why the same fund payout can cost R67,050 in tax if you resign and R0 if you are retrenched
- What you can and cannot take under the two-pot system
- Why spending your R550,000 tax-free amount early can cost you later
- What to ask HR and your fund in your first week
Three Payouts, Not One
When you are retrenched, you may receive several separate amounts:
- Severance pay from your employer: the Basic Conditions of Employment Act sets a minimum of one week’s pay for each completed year of service, and a better deal agreed during consultation replaces that minimum.
- Leave pay, notice pay and any pro-rata bonus: SARS taxes these as ordinary income, not as a severance benefit.
- Your retirement fund benefit: this is yours, and it is a different payout from severance.
The lump sum your employer pays for the loss of your job can qualify as a “severance benefit” for tax. According to SARS, you qualify if your employer stopped or intends to stop trading, or is making a general reduction in staff, or if you are 55 or older, or permanently unable to work. You do not qualify if you held more than 5 percent of the company’s shares. Your employer applies to SARS for a tax directive before paying you.
How You Leave Decides the Tax
A fund payout is taxed on one of two tables, which we explain in our guide to leaving a retirement fund:
- The withdrawal table, which is tax-free only on the first R27,500, is used if you resign.
- The retirement table, which is tax-free on the first R550,000, is used when the withdrawal is because your employer retrenched you.
The retrenchment treatment is described by Momentum, a retirement fund administrator, and it applies to cash from the vested component. Check with your own fund how your exit will be recorded. The reason for leaving on your paperwork matters.
Worked Examples
These are calculated with the 2026/27 tables and are for illustration only.
- Example 1: you resign and take R400,000 in cash from your vested component, with no earlier lump sums. Tax is 18 percent of (R400,000 minus R27,500) = R67,050.
- Example 2: you are retrenched and take the same R400,000. It falls inside the first R550,000, so the tax is R0.
- Example 3: you are retrenched, receive R300,000 as a severance benefit and take R400,000 from the fund. Both use the same R550,000 band. Total R700,000 gives tax of 18 percent of R150,000 = R27,000.
- Example 4: you take only the R300,000 severance benefit and leave the fund alone. The tax is R0, and R250,000 of your tax-free amount is left.
The tax-free amount is a once-in-a-lifetime allowance. SARS adds up every retirement and severance lump sum you have received and taxes the new payout as the tax on the total minus the tax on what you received before (the “A minus B” method). Example 5 shows why this matters: you spend R500,000 of the band now, and at retirement you take another R500,000. The later tax is the tax on R1,000,000 minus the tax on R500,000, which is R101,700. Had you not touched the band, the same R500,000 would have cost R0. This ignores investment growth and the rule that limits cash at retirement.
What the Two-Pot System Lets You Take
Since 1 September 2024, your fund is split into components. According to Momentum, these are the rules when you leave a job:
- Vested component (savings up to 31 August 2024): you can take it in cash or leave it in the fund. This is where the retrenchment tax treatment applies.
- Savings component: you can take all or part of it in cash, taxed at your marginal rate between 18 and 45 percent. On R30,000, that is between R5,400 and R13,500. Normally you can withdraw from it once per tax year.
- Retirement component: you cannot take any of it in cash, apart from limited exceptions such as ceasing to be tax resident for three years or an expired work visa.
Momentum’s March 2026 update says a second savings withdrawal in the same tax year is allowed if you take the full remaining balance and end your membership. Ask your fund whether it applies the same rule.
Cosatu has asked for retrenched workers to get access to the retirement component. In September 2025, National Treasury said it was willing to start discussions, with conditions such as proof of no other income. This is not law, and you cannot plan on it. See Moonstone’s report.
Your Options
- Preserve: leave the money in your current fund as a paid-up benefit, or move it to a preservation fund or your new employer’s fund. A transfer is not taxed. You must move the vested, savings and retirement components together, and you cannot split them.
- Cash out part: take only what you need, starting with the savings component, which you can take whether or not you are retrenched.
- Cash out all: possible for the vested and savings components, but it uses your tax-free band and leaves you with less at retirement.
An actuary at an advisory firm writing in the Daily News recommends preserving unless you urgently need the money and have no other safety net. You can also claim from the Unemployment Insurance Fund (UIF) when you lose your job, so check what you qualify for before you take cash from your fund.
Your First-Week Checklist
- Ask HR how your exit reason will be recorded and which tax directive will be used.
- Ask your fund for a benefit statement that shows the vested, savings and retirement components separately.
- Check what happens to your group life, disability and funeral cover. It usually ends with your employment, and the window to convert it can be as short as 30 days.
- Apply for UIF.
- Do not sign a settlement or withdrawal form until you know the tax.
Key Takeaways
- Severance pay, leave pay and your fund benefit are three different payouts.
- A retrenchment payout from the vested component uses the retirement table, and a resignation payout uses the withdrawal table.
- Severance and fund payouts share one lifetime R550,000 tax-free band.
- You cannot take the retirement component in cash, and access for retrenched workers is only a proposal.
- Preserving usually costs less tax than cashing out, but your circumstances decide.
Frequently Asked Questions
Can I withdraw my pension fund if I am retrenched?
You can take the vested component and the savings component in cash. You cannot take the retirement component, which is the two-thirds of contributions since 1 September 2024.
How is a retirement fund payout taxed if I am retrenched?
According to Momentum, cash from the vested component is taxed on the retirement lump sum table, with the first R550,000 tax-free over your lifetime. The savings component is taxed at your marginal rate.
Is severance pay taxed?
A lump sum that qualifies as a severance benefit is taxed on the retirement lump sum table, with the first R550,000 tax-free. Leave pay, notice pay and bonuses are taxed as ordinary income.
How much severance pay am I owed?
At least one week’s remuneration for each completed year of continuous service, under section 41 of the Basic Conditions of Employment Act. A better deal agreed during consultation replaces the minimum.
Should I cash out my retirement fund after retrenchment?
Only if you urgently need the money and have no other income. Cashing out uses part of your tax-free amount, ends the growth on that money and can cost more tax later.
Can I move my retirement fund to a preservation fund?
Yes. The transfer is not taxed. You must move the vested, savings and retirement components together to the same new fund, or move a proportionate share of each to more than one fund.
Do I lose my life cover when I lose my job?
Group life, disability and funeral cover usually ends with your employment. Some insurers let you convert it, often within a short window of about 30 days.
Plan Before You Withdraw
Use our retirement annuity calculator to see what your savings could grow to if you leave them alone. If you are weighing a large payout, request a portfolio review.
This article is general information and not financial, tax or legal advice. Your fund’s rules, your employment contract and the way your exit is recorded affect your tax. For help with your own situation, request a portfolio review, and speak to a labour lawyer about your retrenchment terms.
