When moving employers, you are permitted to move your previous provident fund to your new employer. However, before making a decision, it is important to understand all the options available to you.
Should you wish to take a cash lump sum before transferring the funds into another provident fund or a provident preservation fund, you are permitted to take any amount, but it will be subject to the withdrawal lump sum benefit tax, said Siphamandla Buthelezi, head of platforms and retirement fund administration at employee benefits advisory firm NMG Benefits.
“Firstly, it must be noted that in accordance with the current retirement regime individuals are able to make full withdrawals from their pension or provident fund when they cease employment. Further to this, individuals are also able to make once-off withdrawals from their pension preservation or provident preservation fund(s),” he said.
Should you resign and you decide to use some or all of your pension funds, these are some of the things to consider.
The tax implications: The government is going to tax you for the withdrawal you make before time.
“It is important to note that upon your first withdrawal of your pension fund, you do not get taxed for the first R27 500 you withdraw. Any amount after this, a certain percentage of it will be taxed. If it is your first time withdrawing from your pension and you’ve never done it before, it is important that it is your first time because if you had, you would have already exhausted your R27 500 free tax rule. You would now be attracting tax on the entire amount,” said Buthelezi.
For example, should you withdraw R100 000 from your pension fund to pay off some of your debt and sustain yourself until you find another job, this portion of your fund after R27 500 will attract an 18% tax rate, and this amount and this amount works up to R30 000 in tax which you are going to pay. In essence, you end up receiving R82 000, and the rest goes to Sars. If you had already withdrawn, this would be much more.
Echoing his sentiments was financial planner Warren Ingram.
Ingram said it is important to always remember that tax calculations are done where they look at what you previously withdrew after a certain date, and they calculate tax using that amount.
“The amount you withdraw is not the amount that you receive. A lot of people make the mistake of thinking that the money they withdraw is what they will receive. This is not true as per the tax fee of anything above R27 500,” he said.
Another aspect to keep in mind, Ingram said, is that when you leave an employer, you’re not forced to withdraw. There are other options you can use in order to preserve your funds.
“This withdrawal is something you are doing voluntarily, because there is a way of preserving that pension fund.”
Things are never as bad as they seem in a particular moment, and the same goes for money. It is possible to use some money for a business venture, and it booms successfully, but in the same breath, it is important to note that the risk is high, and most times, you find that things don’t necessarily go your way.
Compound interest and its relationship with time.
Because of the way that the financial markets work and how volatile they are in the short term, time plays a very important role. You want to be invested for as long as possible to make sure that during those up cycles, you are invested. So, the more time you give your investments, the more likely you are to get good returns.
The current situation is that less than 10% of South Africans are able to retire comfortably, and a more close-to-home example of this is the amount of money young people find themselves sending back home for their parents because they cannot sustain themselves. The reason for this is because they don’t have enough to retire.
It’s not always fun saving for retirement, and we’re not guaranteed to live that long, but if you have a legacy picture in mind, then it’s all going to make more sense.
“We recommend that, if you do not require a cash lump sum from your provident fund, you transfer the full portion into a provident preservation fund to preserve the capital,” concluded Ingram.