I am 51 and under debt review. I have just been discharged from hospital having recovered from Covid-19 and will need funds to settle medical bills, obviously totally unforeseen. I have a pension fund that is currently being transferred from one company to another worth R4 million.
I am employed at present and have a sizeable pension with my employer. I have never taken funds from the pension mentioned and I’m wondering if I could withdraw from this fund when it gets transferred. I will need about R80 000 to help settle these bills. Please advise, I really need these funds.
In order to answer your question, we need to look at options available to individuals when they leave their employer.
In the event of resignation or retrenchment, you have the following options:
- Withdraw your benefit in cash;
- Elect to move your money into a preservation fund or a retirement annuity; or
- Transfer your benefit to your new employer’s pension or provident fund.
You may withdraw your benefit in cash, bearing in mind that the funds will be taxed as per the withdrawal benefit table. This option is suitable for individuals who may be in need of funds for various reasons.
You may elect to move your money into a preservation fund or a retirement annuity, thereby preserving your capital for your retirement years. A preservation fund allows one withdrawal prior to retirement (subject to tax) but funds in a retirement annuity are not accessible prior to age 55.
You may also transfer your benefit to your new employer’s pension or provident fund, where you will not have access to the capital until such time as you leave that employer. This option is therefore not suitable in your situation where you need access to the funds and we recommend that you contact your fund administrator or HR division as soon as possible to halt the transfer if it is still possible.
We always encourage preserving your benefit for retirement (option 2).
If your ex-employer’s fund allows, you may take a cash withdrawal directly from the fund and transfer the balance to a preservation fund, effectively combining options 1 and 2.
If the rules do not allow for the benefit to be split, you can transfer the full benefit to the preservation fund and then withdraw the necessary funds from there. It is important to note that the withdrawal will be subject to tax and the balance of the capital will need to remain in the preservation fund until you reach age 55.
The cash withdrawal will be taxed in accordance with the withdrawal tax table:
|Withdrawal tax table|
|First R25 000||Tax-free|
|R25 001 to R660 000||18% of the amount over R25 000|
|R660 001 to R990 000||R114 300 + 27% of amount over R660 000|
|R990 001 and above||R203 400 + 36% of amount over R990 000|
The transfer to a pension preservation fund will be tax-free.
How does a pension preservation fund work?
A preservation fund is a retirement fund, which preserves proceeds from a pension or provident fund where a person leaves their employer prior to retirement, for example on resignation. These are not occupational funds, and no ongoing contributions may be made to the preservation fund.
Transfers to preservation funds do not incur any tax and the growth within the fund is also free of tax, making them a very tax-efficient investment.
When reaching retirement age (55), you will be able to access one-third of your capital as a cash lump sum (subject to tax) and the balance will be applied to purchase an annuity, which is a recurring income that will be paid to you for the rest of your lifetime.
‘One withdrawal rule’ on preservation funds
Preservation fund members are allowed one full or partial withdrawal from their capital before retirement. As mentioned above, the withdrawal from your preservation fund will be taxed in accordance with the retirement fund withdrawal tax table.
Individuals are allowed to have more than one preservation fund and will be permitted one full or partial withdrawal on each respective preservation fund.
We therefore recommend that you stop the transfer process of your pension fund as soon as possible if you are still able to, in order to give you time to consult with a financial advisor to consider the best route forward as you will not be able to consider options 1 and 2 (or a combination thereof) once the funds are transferred to your new employer’s fund.
Please do not hesitate to contact us for further information, detailed analysis and guidance in terms of the options available to you. Alternatively, you may contact your financial advisor to discuss the recommendation above.