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I want to use some of my pension on debt and a deposit on a house

Where can I transfer the remaining funds without incurring too much tax?

I read a Moneyweb article on early withdrawal from one’s pension fund and I need your advice please.

I have done a lot of research and fully understand the tax implications. My pension is currently at R3.2 million, a nice sum which I have accumulated over 25 years of working.

I have resigned and I would like to use some of my pension to settle my debts and put a nice deposit on a house. Where would you recommend I transfer the balance of my pension to lessen the tax burden?

Please note that the information provided below does not constitute financial advice. Generic information has been applied in the context of your question. We have very limited detail about you and your circumstances, and such detail may impact any advice provided.  

To begin with, in case you didn’t pick it up in your research, I want to point out that any lump-sum amount withdrawn is subject to tax, and any previous withdrawals will be taken into account. Furthermore, if you make any withdrawals in the future, before or after retirement, they will be aggregated with the proposed withdrawal you mention, as well as any previous withdrawals if applicable. As a practical example, if you withdraw R500 000 now and take another R750 000 when you retire, you will not get the first R500 000 tax free, per the current ‘Retirement Lump Sum Benefits’ tax table (see below), but will have to pay tax per the prevailing tax table. In this example, the retirement withdrawal would attract tax of R220 500 based on having taken a R500 0000 pre-retirement withdrawal, but tax of only R49 230 would apply if no previous withdrawals were taken.

The tax tables applicable to lump sums withdrawn from retirement products, before and after retirement, are shown below. 

Lump Sum Benefits tax table – pre-retirement withdrawals

0 – R25 000

0% of taxable income

R25 001 – R660 000

R0 + 18% of taxable income above R25 000

R660 001 – R990 000

R114 300 + 27% of taxable income above R660 000

R990 001 and above  

R203 400 + 36% of taxable income above R990 000

The first R25 000 of your pre-retirement withdrawal is tax free. This only applies once in your lifetime across all your retirement annuities and preservation funds.

Lump Sum Benefits tax table – withdrawals after retirement

0 – R500 000

0% of taxable income

R500 001 – R700 000

R0 + 18% of taxable income above R500 000

R700 001 – R1 050 000

R36 000 + 27% of taxable income above R700 000

R1 050 001 and above

 R130 500 + 36% of taxable income above R1 050 000

This table is based on your cumulative cash amount withdrawn from all pension funds, provident funds, retirement annuities and preservation funds. The amounts shown in the table will be reduced by any previous amounts withdrawn.

In addition, the following portion(s) of the cash lump sum will be tax-free: contributions to the fund that were not tax deductible when contributed.

Moving on to the crux of your question. In certain instances, the rules of your fund will determine where you can transfer your remaining lump sum benefit. Typically, you have the choice of transferring to either a pension preservation fund or a retirement annuity.

The similarities between a pension preservation fund and a retirement annuity, in the context of your question, are, inter alia:

  • The transfer of your accumulated lump sum pension benefit is free of tax
  • Your investment choice is guided by Regulation 28
  • Tax free growth within the investment
  • There are no executor fees on death
  • There is no estate duty on death
  • On retirement you can take up to a thirdin cash (taxed per the table above) and the balance must be used to purchase an annuity.

The main difference between a preservation pension fund and a retirement annuity is that the preservation funds allow for one withdrawal pre-retirement whereas a retirement annuity has no liquidity pre-retirement (other than emigration or disability).

Considering the information above, in a typical scenario the preservation fund often makes sense over a retirement annuity given the added benefit of a pre-retirement withdrawal if required (bearing in mind that the withdrawal is taxed at a higher rate than it would be at retirement).

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

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