Think Twice Before Cashing In Your Pension Fund

Mindoro Group (Pty) Ltd

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. 

EVENTTAX IMPLICATIONSRESTRICTIONS
RESIGNATIONResignation Tax Table appliesNone – full fund value available
RETRENCHMENTRetirement Tax Table appliesNone – full fund value available
RETIREMENTRetirement Tax Table applies1/3rd 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. 

 PeterVusiSarah  
 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.