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Accessing pension lump sums on early retirement: rules and tips

I want to make a query regarding to lump sum withdrawals. In 2014, at 54, my dad resigned from his job at Eskom after 39 years and ten months service, as he was drowning in debt. His pension fund was worth R1.8 million when he submitted the resignation letter. He received a lump sum payment of R594 000. He paid his bond, did renovations to his home and paid other debts off, but not all of them. He receives R5 800 every month from Eskom and it's not enough to maintain his lifestyle. He is starting to make debts left, right and centre. 

Is it possible for him to withdraw some money from his pension fund that was left and how much can he withdraw? What I fail to understand is, he wanted to take all his pension money and pay the penalties if there were any, but they refused to give him the money. What he was told was he can only get all his money if he left his post for another job, not if he would be sitting around doing nothing. Can you please provide me with some advice? This is putting strain on my family.  

Mduduzi Luthuli - Luthuli Capital (Pty) Ltd

Mduduzi Luthuli, head of wealth management at Luthuli Capital, answers:

I’m sorry to hear about your dad’s current predicament. Debt is a sad reality in our society. Households debt to income in South Africa averaged 56.91% from 1969 until 2015, reaching an all-time high of 86.40% in 2008. It’s since come down to just below 80% (still uncomfortably high), as last reported by the South African Reserve Bank. Investopedia defines a debt-to-income ratio (DTI) as a way lenders measure an individual’s ability to manage monthly payment and repay debts (divide total recurring monthly debt by gross monthly income). 

South Africans are becoming more heavily indebted, with interest rate hikes and the weak economy crippling households. Our annual salary increases seem to lag more behind the actual cost of living (our expenses), every year. It seems the middle-class will soon be on the endangered species list. We are becoming a society of the rich and poor, with diminishing space for anyone in between; some reports claim we’re the world’s most unequal society. I hope my response below provides some assistance in resolving, or at least, managing your current situation.

The rules in withdrawing from a pension fund

Let’s first look at the rules behind withdrawing from a pension fund and what options your dad would, and should have had.

Withdrawal benefits are paid to workers who leave work either through dismissal or resignation before they’re due to retire. Usually, if a worker resigns and withdraws from a pension fund, they’re entitled to a payout of both employer and employee contributions made to the fund during the full term of their service, plus investment growth on those contributions. The worker in some cases might not get the employer’s contribution to the fund.

At withdrawal, current legislation allows for full access on the funds, but they’ll be taxed as per below:

Retirement fund lump sum withdrawal benefits

Taxable income (R)

Rate of tax (R)

0 – 25 000

0% of taxable income

25 001 – 660 000

18% of taxable income above 25 000

660 001 – 990 000

114 300 + 27% of taxable income above 660 000

990 001 and above

203 400 + 36% of taxable income above 990 000

 

The Eskom Pension and Provident Fund (EPPF) is governed by the Pension Fund Act and your dad should have had full access to his funds, subject to taxation. Resignation would have meant he’d have ceased to be employed by Eskom. This would be in line with him leaving his current post and thus gaining access to the cash, subject to taxation (or penalties as you described).

The lack of access to the funds and the lump-sum amount received of R594 000 lead me to believe that your father took early retirement, rather than resigned from the fund. This is why:

Rules of retiring from a pension fund

When retiring from a pension fund, the Act allows for the following:

You may only access your money when you reach the allowed and accepted retirement age. You can’t retire before the age of 55 except if:

  • You’re permanently disabled
  • You emigrate (T&Cs apply)
  • Your investment value across all your investments in the fund is less than R7 000.

 

You state your father was 54 years when he resigned, but I’m hoping he would have had a decent employee benefits consultant at Eskom (EPPF) who would have advised him of the tax benefits of waiting until he turns 55. At this age he would have qualified for early retirement and the following tax table would have applied to his situation:

 

Retirement fund lump sum benefits or severance benefits

Taxable income (R)

Rate 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 1050 000

 

At early retirement he’d now be entitled to a tax-free amount of R500 000, versus just R250 000 at withdrawal/ resignation. 

When you retire, a maximum of one-third of the market value of your investment can be taken as cash. You say your dad received a lump-sum payment of R594 000: this is almost equivalent to one-third of R1.8 million. In fact it’s R6 000 short of being a third of the benefit. It’s feasible that the slight difference is due to any tax liability that may have existed. The remainder must be used to purchase a pension-providing vehicle, eg a living annuity or life/ guaranteed annuity. If the market value of your investment at retirement is equal to or less than R247 500, the full amount can be taken as cash. 

You say he then started receiving a monthly income of R5 800 every month from Eskom. If one resigns from an employer, they cease to be part of the employer’s scheme and thus wouldn’t be entitled to any further income from the employer.

Now, an employee’s allowed to retire inside their current employer’s scheme. This is common-practice, especially with defined-benefit schemes as opposed to defined-contribution schemes. The EPPF is a defined benefit pension fund, registered as a self-administered pension fund in terms of the Pension Funds Act of 1956 and approved as a pension fund in terms of the Income Tax Act of 1962. We also see this practice (retiring within your employer’s fund) happening largely in the Government Employees Pension Fund (another defined benefits pension fund).

I’m then led to assume the income he’s receiving from Eskom is his annuity income or post-retirement income as per fund rule 24 of the EPPF.

If your father forms part of an annuity he won’t be allowed access to the cash, or rather he won’t be allowed to withdraw the funds from the annuity into his personal bank account.

Guaranteed vs living annuities

I’ll assume he forms part of a guaranteed annuity as opposed to a living annuity.

Guaranteed annuities are more common when it comes to defined benefits. A guaranteed annuity will provide an income that’s guaranteed to last your whole life (and your spouse’s, if applicable), but your heirs won’t inherit whatever is left when you die. In other words, your capital dies with you. Typically, you have no say over your initial income and no flexibility to make changes once you’ve purchased the product. There are various types of guaranteed annuities, eg those that provide an income that increases with inflation; those with a level income; and those that depend partially on market returns.

A living annuity provides you with flexibility to choose your income each year (subject to regulatory limits) and where your money’s invested. Any remaining capital after your death passes to your heirs. But, in exchange for this flexibility, you take on the risk that you outlive your savings and that your investment returns are poor. This means your future income could fail to keep up with inflation, or that you outlive your savings. 

You may transfer your guaranteed annuity to another insurer. This transfer is subject to the requirements of the underwriter(in this case EPPF), the regulatory authorities and the insurer that you are transferring to.

Ask your father which of the above features most sound like the product he’s accepted and forms part of.

It’s for this reason that I always emphasise that clients contact a wealth manager for guidance with such decisions. There is no one-size-fits-all answer. It sounds to me that either your father was poorly advised upon taking early retirement – ie the full features of the annuity weren’t explained to him – or post-retirement money-management advice wasn’t given to him before or during his decision-making process. Thus we would eventually be in this situation once again in future after the funds are depleted.

Financial management isn’t an easy skill to learn or master, so this isn’t a judgement on your father. If it’s the former situation and he feels he wasn’t properly advised, he may lodge a complaint directly with the EPPF – the onus is on it to prove that the advice he received was appropriate and sufficient and was from a trained and competent EPPF representative.

As an EPPF employee and client, if he feels that his rights were prejudiced, or that he’s been aggrieved in any way, he has the right to lodge a complaint. If he cannot settle his complaint directly with the EPPF, he’s entitled to refer his complaint to the office of the FAIS Ombud, at info@faisombud.co.za or 0860 324 766. The ombud provides a redress mechanism for any inappropriate financial advice you feel may have been given to you by a financial services provider.

I really hope and pray that you and your family are able to get through this current situation with dignity. Consult a wealth manager to get a full picture of the options available to you.

Do you have any questions you would like answered by registered financial planners?

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COMMENTS   12

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He did home renovations with his pension money, i can’t believe it.

Indeed. And he should glad he didn’t get paid out it all. Then he wouldn’t even be getting R5000pm.

No advice or investment strategy can help someone that has not saved enough for their retirement. If you’re going to spend what little savings you have on renovations then your problems are self inflicted.
This chap needs to sell his renovated house, downscale his lifestyle and learn how to survive on very little. That Eskom pension will be his saving grace

I must congratulate Mduduzi Luthuli on handling this query in a professional manner.

My sympathy to the person who raised the query.

I see virtually by the week how friends and family treat their future retirement with disdain and resentment. Debt is their friend and ally, Life is wonderful with a new 4×4 SUV. Of course, an off-road caravan has to go with it. And so the tragedy goes on and on…

Rule of thumb reckons you need approximately R1m for every R4k pension you want per month, and that is before tax. So, for a pre-tax monthly pension of R40k you need a pension of R10m. Have you won the lotto recently?

Well, at least the caravan can double as his retirement home.

Seeing R500 000 in his account he probably thought he is rich. People don’t understand that money that flows out and not coming in is a sure way to bankruptcy. I bet you he felt like Sol Kerzner when he had that money. Self-created problems unfortunately.
Renovating a house at that age was a bad idea.

Dear me, aren’t we judgmental today… “Renovations” could mean painting walls that haven’t seen paint for 15 years, fixing the plumbing or replacing rotted roof timbers – all of which are more in the line of essential maintenance rather than renovation as such. I see no mention of swimming pools, Jacuzzis or wine cellars that might give some cause for scorn.

So, you’d rather have pretty walls, than food on the table?

We all know what “renovations” means: New kitchen and bathroom.

He cannot maintain his lifestyle on his small pension at 54. The good news is that there is a fix for the problem. What he needs to do is to GET A JOB.

He would be better advised to direct any compliant to the Pension Funds Adjudicator – the FAIS Ombud doesn’t have any power over the EPPF.

Also, the advisor states, “You may transfer your guaranteed annuity to another insurer” – this is not correct. You can’t transfer a guaranteed annuity, but you may transfer a living annuity.

End of comments.

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