The system of taxing retirement funds varies the world over. Traditionally in South Africa contributions to a pension fund could be claimed as a rebate against tax payable. Likewise there was no tax on the build up or earnings of the capital.
The earnings were partially taxable. This is known as the EET system or the Exempt, Exempt, Taxed system.
In New Zealand, there is no rebate for pension contributions and the build up on funds is taxed, but pensions are tax free (this the TTE system). It is used in very few countries.
George Rudman, Sanlam senior general manager, says that South Africa was in line with many other countries and followed the EET system.
However, changes following the Katz Commission recommendations to tax the income build-up of the funds changed the South Africa system to one of ETT.
This is in line with countries like Belgium, Denmark and Sweden.
Countries sticking to the EET system include the United States, Britain, Germany, Ireland, and the Netherlands.
However, there are numerous variations within the broad taxing outlines, particularly when it comes to the treatment of lump sum payments. For example, in Australia, Ireland, Japan and Britain lump sums escape any harsh tax treatment but in Canada and France lump sum benefits are prohibited, forcing taxpayers to take a monthly pension.
Main variations are on limits in categories similar, for example, to the capping in South Africa at 22,5 percent of pay to retirement contributions. State social pensions, which are more generous in Europe, also affect the taxation and size of private pension funds.