Shaun asks: I am starting a new job in Jan 2011. My pension fund sits at R300k. I need some advice on whether I should transfer it to the new company’s pension fund or withdraw it and put in into my bond or purchase a second property and rent it out or put it into a preservation fund.
What are the tax implications if I withdraw it now and how will it affect me when I retire?
Maya replies: There are tax implications of withdrawing your funds which not only affect your final lump sum but also your tax benefits in retirement.
In terms of the tax you will pay now, the first R22 500 is fully exempt from tax. After this exempt portion, the amount up to R600 000 is taxed at 18%, the next R300 000 at 27% and any amount above that figure at 36%.
Because these are standalone tax tables, any other income — or any assessed loss or expenses you may have from other sources — are not taken into account.
In your case, if you withdraw your R300 000, the first R22 500 will be tax free. The remaining R277 500 will be taxed at 18%.
So you will pay R50 000 in tax. But the real financial affect is what that tax will cost you in lost growth.
If you kept that R50 000 invested in a retirement fund for the next 30 years and the fund grew at only 10% a year it would be worth R1-million. So effectively your tax bill is R1-million.
Future tax consequences
All retirement withdrawals are accumulative. That means that on retirement, lump sums previously received are added together to determine the level at which a particular lump sum should be taxed.
This means that you will have forfeited your R300 000 tax-free portion on retirement (or retrenchment). So any money you would like to withdraw at retirement and not place in an annuity would be taxed at the above tax tables.
As you are not in financial difficulty and do not need the money, rather preserve it and keep it for income in retirement. Certainly a goal of paying off your home or investing in a second property is a good one, but do this with savings over and above your company retirement funds.
The reality is that most people are underfunded for retirement anyway and you would need to start an additional saving fund if you want to maintain your lifestyle in retirement. You do not want to be in a situation in retirement where you have a home that is paid off but you have no income.
Transferring the funds to your new employer is usually the most cost effective option and it cuts down on future admin. If you decide to opt for a preservation fund watch the costs carefully or invest directly with unit trust companies that offer preservation funds such as Alan Gray, Coronation or Investec.
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