I’ve retired, why can’t I make another one-third retirement fund withdrawal?

Fund rules limit members to a single one-third withdrawal.

I belonged to the Government Employees Pension Fund (GEPF) and took one-third [of my retirement funds] in 2017 when I resigned; the rest of the money was invested in an Old Mutual retirement fund. I have now reached the age of 55 and wanted another third or a portion of the invested amount in cash and the rest invested again with a monthly income. However, Old Mutual advised that I already took one-third and cannot do this again. What I do not understand is that I took this one-third from my pension in 2017 before it was invested. Why can I now not have access to my money, as I have reached 55 and retired?

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Dear reader,

There are a few different rules and tax benefits that apply to our financial portfolios. Unfortunately, some of the benefits can only be used once in our lifetimes. The decision to make a withdrawal, either partially or fully from any retirement fund – whether pre- or post-retirement – needs to be considered carefully.

Firstly, referring specifically to retirement funds, there are generally two different tax scales that apply in our lifetimes – a withdrawal scale and a retirement scale.

1. A withdrawal scale applies before the age of 55. Any withdrawal taken from a pension/provident fund will be taxed. You will have the ONCE-off opportunity to take R25 000 tax-free, whereafter a sliding scale will apply. Should you make withdrawals in future from a retirement product (this will also apply to a preservation fund in your personal capacity and not only a company structured pension or provident fund), you will not qualify for the tax-free benefit again.

Source: Sars website

2. Once we reach the age of 55, we will be allowed to “retire” from a retirement vehicle. A new sliding scale will apply now. Keep in mind previous withdrawals from the previously mentioned scale will have an impact on this. Any retrenchment package will also have an impact here (I will elaborate on this later). You now have the opportunity to receive R500 000 tax-free. This benefit will apply only ONCE in a lifetime and applies to all of your retirement products combined.

Source: Sars website

When you reach the retirement stage, you have the opportunity to access one-third of your portfolio (referring to retirement vehicles). Of that one-third, only the first R500 000 is tax-free. In most cases, we would not advise withdrawing more than the tax-free component, as you are depleting your retirement funds unnecessarily by paying tax. I would recommend working with a financial advisor when making this decision, as a negative tax implication can lead to unwanted outcomes in your retirement portfolio and income provision.

3. Retrenchment needs to be taken into account. This is an extremely important principle when considering any withdrawal from a portfolio. Unfortunately, a severance package depletes the R500 000 tax-free component that will be available at the retirement stage. Therefore, a calculation needs to be done (a tax simulation can be done in a scenario where you are uncertain or have forgotten what exactly your package consisted of). Be careful to not make another withdrawal at retirement and possibly be taxed in full.

Increasing your R500 000 tax-free benefit

There is a benefit that can be created in a portfolio referred to as Section 10C of the Income Tax Act. If you save sufficiently towards your retirement vehicles before retirement, you will have the opportunity to increase your tax-free component above R500 000. You are allowed to contribute 27.5% of your taxable income towards retirement vehicles (this can include a combination of a provident/pension fund at work, as well as a retirement annuity in your personal capacity).

These contributions are tax-deductible annually, up to a maximum of your personal taxable income of 27.5% or R350 000 per annum. If you contribute more than this, however, the excess contributions will be “pooled” until you retire one day. These excess contributions will be added on top of your R500 000 tax-free component.

Saving sufficiently before retirement therefore gives you the opportunity to increase your tax benefit in future.

In conclusion:

When resigning from the GEPF (in other words, before reaching retirement age), a member has two options:

  • Either take the full amount in cash and pay tax (if tax is payable); or
  • Do a tax-free transfer of the full amount (i.e. the member will not be allowed to take a portion in cash before transferring to another fund) to a pension, retirement annuity or pension preservation fund. The option of a preservation fund is however often opted for as the member is allowed to take one withdrawal from the preservation fund before retirement. 

Rule 14.4.1 of the Rules of the GEPF provides as follows:

“Such transfer shall be made subject to the rules of the approved retirement fund specifying that, with reference to the transfer benefit, any subsequent lump sum benefit payable by that fund or any successor fund to the member and/or his beneficiaries shall be limited to one-third of the said transfer benefit, with interest. The balance of the member’s transfer benefit with interest, after deduction of any lump sum payment referred to above, shall be applied for the purchase of an annuity, albeit immediately or upon the member’s ultimate retirement.”

From my interpretation of the above rule, and as applied by Old Mutual:

  • If the member wishes to make a withdrawal from a preservation fund, the withdrawal will be limited to a maximum of one-third of the benefit; and
  • If the member makes a withdrawal of the full one-third, he/she will not be allowed to take any lump sum on retirement from the preservation fund as this option has been executed before.

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