Publications
Partners
You are changing jobs and have to move your money out of your company’s pension fund. What should you do with it? Is a preservation fund the best idea, or should you move it to a retirement annuity (RA), for example?
The best thing to do is to preserve the funds and not to withdraw them, or “cash them in” as this process is often called.
Now that you have decided to preserve the funds you have two choices, namely to transfer it to a retirement annuity (RA) or to a pension preservation fund. Both options provide similar benefits, being:
1. No tax will be levied on transferring your current pension to an approved pension provident fund or retirement annuity;
2. No tax will be levied on the growth of the investment in the pension preservation and retirement annuity in terms of the five-fund tax approach;
3. No tax will be levied on the funds if you die – it is excluded from your estate for estate duty tax;
4. Your funds will be safe from creditors, who are not allowed to claim against your retirement funds; and
5. On retirement the first R500 000 of the amount you withdraw will be tax free.
The biggest difference between a pension preservation fund and a retirement annuity is that a pension preservation fund allows you to withdraw once before the age of 55, providing you with an emergency exit – should you need it. A retirement annuity does not.
Under which circumstances is it acceptable to cash out your pension money?
Preferably not before your official retirement date. The problem with withdrawing before retirement is that you are taxed at a much higher rate.
The first issue is that, if you change jobs, or withdraw from your pension or provident preservation funds before age 55, you will only receive R25 000 tax free compared to R500 000 upon retirement.
Second, people who use their pension funding to consolidate or settle debt very seldom adjust their expenditure budgets and keep on spending at the same rate as before, leaving them with not enough extra income to “catch up” on their pension savings.
My advice would be to revisit your expenditure budget, increase your contributions to your pension funds (you can contribute as much as 27.5% of your taxable income with a limit of R350 000 per year) and receive between 18% and 41% back from Sars as a tax refund. The tax refund should then be used to pay extra lump sums into your house bond or debt. The growth in your pension fund is tax free and after age 55 you can withdraw R500 000 tax free that can be used to settle the last bit of debt and leave you debt free and with funds for your retirement.
Wouter Fourie is director of Ascor Independent Wealth Managers and was named financial planner of the year for 2015/16.
This is part two of the cover story that originally appeared in the 10 November edition of finweek. Buy and download the magazine here.
