When you are leaving your employer, you may wonder what you should do with your Pension and /or Provident Fund.
Can you withdraw your retirement funds before you retire without being penalised?
The simple answer is yes, but be aware of the risks.
Living costs have gone up, with debt levels rising as a result. Household cashflow may be under pressure, and job security is an ever-present concern. These are all valid reasons to access some (if not all) the funds in your Pension Fund when leaving an employer.
Cashing in your retirement savings prematurely has a double cost: you reduce your tax-free lump sum when you retire, and you pay more tax on your retirement savings.
When you resign, you are allowed access to only R25,000 tax free – a SARS regulation. Any amount over that is taxed at a significant 18%. Withdraw more than R660,000, your tax rate is 27%, and 36% on amounts over R990,000.
Let’s look at an example. You are changing jobs and want to cash in a R400,000 pension fund. You will pay 18% tax on R400,000 minus R25,000 (your allowed tax-free amount). So, you will pay R67,500 to SARS.
Should you withdraw again on your next resignation … well, you can imagine the impact on your long-term savings. Please note that R25,000 tax free amount does not apply to every single withdrawal. On every pre-retirement withdrawal the amount will get aggregated to the previous withdrawal, and you’ll end up paying more and more in taxes.
If you reach retirement, the retirement tax tables apply – that is, the rate of tax is determined by the taxable income. If you waited until retirement to cash in, your first R500,000 is tax-free.
South Africans are notoriously poor savers and our retirement statistics are poor. Only about 6% of South Africans retiring can afford to do so at age 65. A major contributor to jeopardising your financial wellbeing is the repeated drawing of retirement funds when leaving employers.
A full transfer from your retirement savings to your living annuity means no tax implications.
Avoid borrowing from your future.
Preserve your retirement funds for retirement. It’s not that far away!
South African citizens who emigrate are entitled to have their pensions paid to them in their country of emigration, or they may choose to take the amount in cash. If you emigrate before you retire, you may withdraw all your pension or provident funds with no penalty.
You know that you may not withdraw from a Retirement Annuity before 55, and, on retirement, may access only one-third of your funds. The rest buys a pension. If you emigrate, however, you may take the whole amount in full. From 1 March, 2019, the same concession applies to members of pension provident funds. Provident pension members can take their whole amount in cash.
It’s important to note that relocation is not emigration, and, without formal emigration, the usual tax rules apply.
This information is particularly relevant in light of reports of increasing numbers of South Africans considering emigration. For Craig Turton’s message on choosing to stay in South Africa, click here.
Chartered Wealth Solutions is an authorised financial services provider
(FSP no. 13909)