The average South African will change jobs between five to seven times in his or her life time. When faced with this decision, there may be an outstanding debt, for example a student loan that one may want to settle.
These question arise: Should I exercise my option to take the one withdraw and pay off my debt? Or do I preserve my retirement capital? The choice you make at this point in your life, will have an ultimate impact on whether or not you achieve your retirement income objective.
One may argue that it may be a good decision to pay off your debt and thereby increasing your disposable income. The other point of view is that you should not take a loan against your retirement savings – effectively that is what you will be doing by withdrawing from your retirement savings.
The Immediate Impact
On resignation, should you choose to exercise your option to withdraw cash from your retirement fund (pension or provident fund), you will be liable for tax on the amount that you choose to withdraw. Depending on the rules of the fund you will also forfeit a substantial portion if not all of your previous employer’s contributions to your retirement fund benefit.
The table below illustrates the tax liability incurred depending on the amount of the withdrawal benefit.
Withdrawal from a Pension, Provident Fund
|The taxable lump sum withdrawal benefit which accrued as from 1 March 2009, retirement lump sum benefits which accrued as from 1 October 2007 and severance benefits accrued as from 1 March 2011 are aggregated according to the table below:|
|Taxable income from Lump sum benefits||Rate of Tax|
|R0 – R25000||0% of the taxable income.|
|R25001 – R660 000||18% of the taxable income exceeding R25000|
|R660 001 – R990 000||R114 300 plus 27% of the taxable income exceeding R660 000|
|R990 001 and above||R203 400 plus 36% of the taxable income exceeding R990 000|
The Future Impact
The decision to withdraw from your retirement fund, will have a negative impact on your retirement savings. Whilst the withdrawal sum may seem an insignificant amount at the time, you will never make up amount taken due to the compounded financial loss incurred over the term leading up to retirement.
Hence you will therefore need to invest a larger amount at a later stage to make up for this loss.
Assuming on resignation that you choose to preserve your retirement fund, the ideal choice would be to transfer your retirement fund to a preservation fund.
A preservation fund is a retirement fund designed specifically to invest the proceeds of your pension or provident fund. You may transfer your proceeds to such a fund in the event you are dismissed, retrenched, or you resign, thereby preserving both your retirement investment and the tax benefits.
No more than one withdrawal may be made by the member of a preservation fund. The one withdrawal applies separately to each preservation fund. A withdrawal from a preservation fund will be taxed as any withdrawal from a retirement fund (see table above).
The choice you make on resignation, is a critical decision, and may be the difference between retiring financially secure or financially dependent on family and the state, ensure you seek proper financial advice.