What Every Working Professional Needs to Know
By Tokiso TKay Nthebe
One of the most common questions I receive from professionals is this:
“When I retire, will my pension money be taxed?”
The short answer?
Yes — but not always in the way you think.
Understanding how retirement benefits are taxed is not something you leave for age 55. It should form part of your retirement strategy from your first job.
Let’s break it down clearly.
The Legal Framework
In Lesotho, the taxation of retirement benefits is governed by:
- The Income Tax (Amendment) Act No.11 of 2012
- The Income Tax (Superannuation and Life Assurance) Regulations
According to these laws:
Retirement benefits from employment are exempt from income tax up to 25% of the total basic salary earned during your employment period.
Retirement benefits include:
- Gratuity
- Severance pay
- Benefits from a complying pension fund
- Benefits from a provident (superannuation) fund
This 25% exemption is the key number to remember.
Let’s Use a Real-Life Example
Meet Tsietsi.
- Monthly salary: LSL10,000
- Annual salary: LSL120,000
- Years worked: 30
- Contribution rate: 10% employee + 10% employer
- Total retirement savings at retirement: LSL1,600,000
Over 30 years, Tsietsi earned:
LSL3,600,000 in total basic salary.
The law allows him a tax exemption of:
25% × LSL3,600,000 = LSL900,000 tax-free
Scenario 1: Tsietsi Takes Everything as Cash
If Tsietsi withdraws the full LSL1,600,000:
- Tax-free portion: LSL900,000
- Taxable portion: LSL700,000
- Tax rate: 25%
- Tax payable: LSL175,000
That means Tsietsi walks away with:
LSL1,425,000 after tax
This is why understanding tax before retirement matters.
Scenario 2: Tsietsi Takes One-Third in Cash
If Tsietsi takes one-third (LSL533,333) in cash and uses the remaining two-thirds (LSL1,066,667) to buy an annuity:
- His cash amount falls within the LSL900,000 exemption limit
- He pays no tax on the cash portion
- The annuity income will be taxed according to normal income tax tables as he receives it
This structure can significantly reduce immediate tax exposure.
Why This Matters If You’re 25–50+
Many professionals assume tax is something to think about later.
It isn’t.
If you are 25–35:
The decisions you make today about contributions and fund choice affect future tax outcomes.
If you are 35–45:
You should already understand how your retirement fund type (pension vs provident) impacts taxation.
If you are 45–50+:
Withdrawal strategy becomes critical. A poor decision can cost you hundreds of thousands in tax.
Retirement taxation is not just a compliance issue.
It is a wealth preservation issue.
Important Distinctions
✔️ Pension funds often require part of your benefit to be converted into an annuity
✔️ Provident funds may allow full cash withdrawal
✔️ Cash withdrawals may trigger immediate taxation
✔️ Annuity income is taxed gradually over time
Your withdrawal strategy determines your tax outcome.
The Bigger Question
Instead of asking:
“Will my retirement be taxed?”
Ask:
“How do I structure my retirement withdrawal to minimise unnecessary tax?”
That’s a strategy conversation — not just a compliance one.
Final Thoughts
Your retirement fund may be the largest lump sum you ever receive.
Losing a significant portion of it to avoidable tax simply because you didn’t plan properly is painful — and preventable.
Before making any withdrawal decisions:
- Understand your total lifetime salary
- Calculate your 25% exemption limit
- Consider partial annuitisation
- Seek professional guidance
Retirement is not just about accumulating money.
It’s about keeping as much of it as legally possible.
Tokiso TKay Nthebe is an author, podcast host, financial coach, and Lead Advisor at TKO Financial Wellness & Advisory. She helps professionals who feel overwhelmed by investing and retirement decisions gain clarity, control, and a strategy they trust — so their money works for them while preparing for retirement.
For personalised retirement and tax planning guidance:
www.tkofinancialwellnessacademy.com
info@tkofinancialwellness.com
