According to Stats SA, the unemployment rate increased to an historic high of 30,1% in the first quarter of 2020, with more job losses still to come. Losing your income may have been beyond your control, but the decision you take with regards to your Pension or Provident Fund, is in your control. This decision is crucial to your future financial health.
1. Don’t rob yourself
Retirement savings is your money. Spending it now could mean that you won’t have enough saved to live on, when you retire.
2. Cashing out your Pension Fund is taxing, literally
You can only cash out your Pension Fund if you withdraw from the Pension Fund i.e. when you resign or lose your job. The tax implications are very different depending whether you ‘withdraw’ or ‘retire’ from your Fund.
|RESIGNATION||Resignation Tax Table applies||None – full fund value available|
|RETRENCHMENT||Retirement Tax Table applies||None – full fund value available|
|RETIREMENT||Retirement Tax Table applies||1/3rd cash only. Balance to be invested in an income generating product|
If you resign, or are retrenched, you could typically transfer as much of your fund value as needed for your peace of mind, to a Preservation Fund at a registered Financial Services Provider. Other options would be transferring to a Retirement Annuity or the “new employer” Pension Fund.
3. The long term ‘cost’ involved: withdrawal vs preservation
An example of the financial outcomes of three people: Peter; Vusi; and Sarah; who all lost their jobs and withdrew money from their Pension Funds, is illustrated in the table below.
|Age at retrenchment||45||45||45|
|Pension fund value||R1.5 million||R1.5 million||R1.5 million|
|Amount cashed out||R1.5 million||R100 000||R1.5 million|
|Tax paid on cash-out||R292 500||R0||R292 500|
|Amount transferred to preservation fund||R0||R1.4 million||R0|
|Age, new contributions to new pension fund starts||46||46||46|
|Monthly contribution to a new pension fund||R2 000||R2 000||R17 300|
|Growth rate||10% per year||10% per year||10% per year|
|Age at retirement||60||60||60|
|Total retirement savings||R728 000||R6.3 million||R6.3 million|
|Tax-free lump sum that can be cashed out||R0||R400 000||R0|
4. Holistic outlook
We encourage you to consider various options, before cashing in your Pension as a short-term solution. This could have a negative impact on your long-term retirement plan. What seems to be a good idea now, you could well regret into the future.