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Will I be able to draw all the cash from my pension preservation fund after March 2021?

The scheduled tax legislation change relates specifically to provident preservation funds.

I have an Allan Gray pension preservation fund and I’m feeling very nervous about the new tax laws to be implemented March 2021. I have very little financial know-how so wanted advice on what route to take. There is a strong possibility I will need to access the whole amount within the next year before I turn 55 (I’m now 52). If I cash it in this tax year my tax liability will be approximately R152 000 but if I wait until the next tax year it will be R63 000 – a huge difference. How will the changes in the new tax laws affect my needs outlined above? Will I even still be permitted to do a 100% cash withdrawal after March 2021?

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Thank you very much for sending in your question. In order to provide an answer, I have made some assumptions about your financial situation, but hopefully the explanations of the rules and regulations pertaining to preservation funds will help answer your questions and alleviate your concerns.

In the first instance, we have assumed that your concern regarding the change in legislation is in relation to provident preservation funds. Currently, the legislation states that when you retire from a provident preservation fund, you are permitted to access 100% of the funds subject to the retirement tax tables. On the other hand, if you have a pension preservation fund in place, you are only able to access one third of the investment as a cash withdrawal while the rest must be used to purchase an annuity.

The scheduled legislation change relates specifically to provident preservation funds and provides for the following:

From March 1, 2021, when retiring from a provident preservation fund, the proceeds from the fund will be subject to annuitisation, where you will be required to use two thirds of the proceeds to purchase either a living annuity or a life annuity, which would in turn provide an annuity income. If you are age 55 or older on March 1, 2021 and have not yet retired from the provident preservation fund you are entitled to 100% of the benefit as a cash lump sum,  including any fund returns. If you have not reached age 55 by that date, the compulsory annuitisation will only apply to funds vested after March 1, 2021 – and you will be able to take the full lump sum amount that was invested prior to this date, taxable at the retirement lump sum tax tables.

Assuming you are currently invested in a pension preservation fund, the above legislation will not apply to you. Should you wait until retirement age to access the funds, and you retire from the fund, you will only be able to access one third of the fund as a cash lump sum and the remaining two thirds will need to be used to purchase an annuity. For reference, please see the tax tables below, applicable to the cash withdrawal portion of the fund when retiring from the fund:

Retirement tax table

Taxable income (R) ​Rate of tax
1 – 500 000​ ​0% of taxable income​
​500 001 – 700 000​ ​18% of taxable income above R500 000
700 001 – 1 050 000​ ​​R36 000 + 27% of taxable income above R700 000
​1 050 001 and above ​R130 500 + 36% of taxable income above R1 050 000

In your question, you mentioned that you would most probably need to access the funds before you turn 55. If this is the case, bear in mind that you will only be able to access these funds by making a withdrawal from the preservation fund.

It is important to remember that you are only allowed to make one full or partial withdrawal from a preservation fund prior to the age of 55.

This means that if you have previously made a withdrawal from a preservation fund, you will not be able to access your current funds before age 55. Assuming that you haven’t withdrawn from the fund before, the tax tables applicable to the withdrawal will be as follows: 

Withdrawal tax table

Taxable income (R)​ Rate of tax 
1 – 25 000​ ​0%
​25 001 – 660 000 ​18% of taxable income above R25 000
​660 001 – 990 000 ​R114 300 + 27% of taxable income above R660 000
​990 001 and above ​​R203 400 + 36% of taxable income above R990 000

You further mentioned differing tax liabilities in this year compared to 2021. Kindly note that the income you earn in a tax year does not affect the tax you pay on a preservation fund withdrawal as it is a separate tax liability that is subject only the amount you are withdrawing. For example, if you have R1 million in your pension preservation fund and, assuming you have made no previous withdrawals, you would pay R207 000 in tax and have a net amount of R793 000 available to you.

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

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The stupidist thing in the world is to draw out ANY cash amount from your pension or provident fund, and thereby diminish the capital your future pension will depend on!

The number of colleagues I’ve seen do exactly this to “buy a new car” or “get the wife a new kitchen” or “take an overseas holiday” is never-ending.

And 10 years later they are regretting it as the biggest mistake they made. And of course, now too late for them to recover from.

Invariably happens to those that were always living a lifestyle on the edge, and could never resist the shallow temptation of bling.

Developing financial wisdom is a steady, long-term, discipline that must be assiduously practiced ALL the time. Then, when “big money” suddenly appears (as when retirement happens) wise, long-term, decisions can be made with the studied practice of a lifetime of wisdom, and not the hysterical out of control brain of a 5 year old suddenly let loose in a sweetshop!

That is so true what you are saying. Fools rush in where angels(wise men) fear to tread.

End of comments.

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