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Important things to consider before withdrawing retirement savings

Cashing in your retirement savings can trigger a high tax implication.

The lockdown has had a massive impact on our economy, and as a result, many companies are having to shut their doors or retrench staff to survive.

Many individuals who have recently been retrenched are tempted to tap into retirement savings to make ends meet. We do understand you may require access to these funds if this is your only source of savings but the reality is that retirement will approach us at some point and we need to take careful consideration before cashing in our retirement nest egg.

We would like to highlight a few things to consider before accessing your retirement savings: 

There are three retirement funding options available. These are a pension or provident fund, a retirement annuity, or a preservation fund. Pensions and provident funds will be dealt with together as their tax implications are the same for the purposes of this article.

A retirement annuity investment, you only have access to within limits when you reach retirement which is from age 55. A company pension or provident fund, you will have full access to the funds if you resign or are retrenched from your employment.

If you decide to liquidate your company pension or provident fund at retrenchment, you need to bear in mind the tax implications that are involved.

The qualifying lump sums will be taxed according to the retirement lump sum tax table:

Taxable Amount (R) Rates of tax (R)
0 – 500 000 0% of taxable income
500 001 – 700 000 18% of taxable income above 500 000
700 001 – 1 050 000 36 000+ 27% of taxable income above 700 000
1 050 001 and above 130 500 + 36% of taxable income above 1 050 000
Retirement lump sum benefits consist of lump sums from a pension, pension preservation, provident, provident preservation or retirement annuity fund on death, retirement, or termination of employment.

IMPORTANT: A different tax table will apply to individuals who have decided to liquidate their company pension or provident fund on resignation.

Please note the above table applies to the lump sum taken from a company pension or provident fund if withdrawn in cash when retrenched and will also apply to any retrenchment or severance package paid by the employer.

This means that the first R500 000 is not taxable, but please be aware this is a lifetime limit and does not apply separately per lump sum.

An important point to consider that many people do not, is any pension savings taken in cash before retirement will negatively impact any cash portion taken at retirement. The tax implications on a cash withdrawal at retirement will be high if you have utilised the full or portion of the R 500 000 tax-free lifetime limit.

When the South African Revenue Service (Sars) calculates the tax liability on a retirement cash lump sum they will take into consideration any previous taxable withdrawal, retirement (including retrenchment benefits) and severance benefits you have received into account

A better solution is to transfer your pension savings as there is no negative tax implication and the money is invested tax-free. You can transfer either to your new employer fund or you have the option of transferring your savings to a preservation fund or a retirement annuity.

A preservation fund does not allow you to make additional contributions, but it is specifically designed to invest your lump sum from your company pension and provident fund. If you have not previously withdrawn from your preservation fund, it does allow one-off access to your funds before retirement if required in the future, subject to tax.

A retirement annuity allows you to invest your current pension or provident fund savings and allows you to make additional contributions either as a lump sum or debit order to continue to save for retirement.

While cashing in your retirement savings may seem like the best solution now, we recommend you try avoiding this as it can seriously impact your ability to retire comfortably and can trigger a high tax implication. We do encourage you to consult with an independent financial advisor on the best solution for your circumstances. 

Disclaimer: Please note that the above is for information purposes only and should not be construed as complete and comprehensive investment-planning advice. Individuals are encouraged to consult with a licensed investment advisor/financial planner.

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Michael Haldane

Global & Local The Investment Experts


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