Withdrawals will cost you in tax
Think hard about whether you need immediate access to funds because preservation would certainly be preferable. Specifically, moving your accumulated funds to a preservation fund will likely save you from paying a large chunk of your capital over to the taxman. At the same time, research shows that savings withdrawn from retirement funds are seldom replenished at a later date — so your retired self will need to survive on less as a result.
Preservation allows you one draw prior to age 55
Preservation funds allow you to ‘reserve your rights’ in relation to your options when exiting your group retirement fund by having the funds remain invested, while no longer contributing on a monthly basis. At a later date, should you require access to your investment, you are entitled to one draw on capital prior to the age of 55.
Note that any funds withdrawn are subject to a cumulative taxation scale as below:
| R1 – R25,000 | 0% of the amount |
| R25,001 – R660,000 | 18% of the amount above R25,000 |
| R660,001 – R990,000 | R114,300 + 27% of the amount above R660,000 |
| R990,000 + above | R203,400 + 36% of the amount above R990,000 |
Early withdrawals can also cost you in tax later
After the age of 55, lumpsum withdrawals of up to R500,000 (in total per taxpayer) are tax free. This tax free lumpsum is reduced by any tax exempt retrenchment lumpsums received, plus the total of any retirement fund withdrawals prior to age 55 (even though they were taxed).
Preservation investment strategy
If you are able to preserve your investment but believe you may need to make a withdrawal if you do not find work before your emergency fund runs out, careful consideration of the Preservation Fund investment portfolio can help to avoid financial loss due to market movements.
R25,000 tax-free?
When consulting your group retirement fund in relation to options on retrenchment, it may be advisable to enquire about withdrawing R25,000 tax-free, as listed above, and preserving the balance.
Retrenchment lumpsum benefit may qualify to be paid tax free
SARS allows applicable retrenchment lumpsum compensation payments to be paid tax free. By agreeing to this you are effectively allowing SARS to use your R500,000 retirement tax free entitlement early. This usually makes financial sense as the tax saved at earning tax rates is likely to be more than tax rates in retirement.
What about converting your group life insurance?
A further retrenchment consideration in relation to group schemes is your ability to take over your group life and disability insurance in your personal capacity without requiring you to undergo the medical underwriting process, as one does when applying for insurance. This can be beneficial in particular if you have had medical conditions arise during your employment which is likely to result in an insurer declining to offer you coverage.
By Gareth Leonard, CFP® CA(SA)
