What to do with pension benefits
Have you just resigned to start a new job?
Retirement security is a top financial concern for all employees, and the average employee in SA currently does not have enough savings to prepare them for retirement.
Being aware of the key issues that could affect your retirement benefits at resignation could make all the difference to your financial wellbeing at retirement.
Let’s use a practical example of Miss Nomusa Khumalo.
Nomusa is 45 years old. She recently resigned from her job and has R1-million in her pension fund.
She is a single parent to two kids who are still at primary school and her main expenses are their school fees, bond repayments, car instalments and a personal loan.
She plans to use her pension payout to settle all her debts and renovate some parts of her house, so that when she starts her new job she is debt-free.
Option 1: She can take the whole pension benefit as cash
If she decides to withdraw her pension benefits instead of preserving her savings until retirement, her fund administrator will process her withdrawal of R1-million from the fund. The tax she has to pay is calculated as follows:
From a lump sum of R1-million, the following calculation will be used: R203 400 + 36% x R1 000 000 - R990 000, which means she will pay tax of R207 000 and be left with R793 000 to keep.
Option 2: She can transfer her pension benefit to a retirement fund
Nomusa may instruct her fund administrator to transfer her pension benefit to a preservation fund or a retirement annuity – which allows you to preserve your funds until retirement.
The benefits of preserving her retirement savings means she won’t pay tax when transferring her benefit, and her money will continue to grow.
In a preservation fund, she can make one partial or full withdrawal before retirement.
This depends on the rules of her employer fund.
She cannot withdraw funds in a retirement annuity until retirement age (55) and can have peace of mind knowing that her retirement is provided for.
How will a withdrawal affect Nomusa in the future?
Taking the money now may seem like a great option because she still has more years to work and may recover her pension benefit.
Retirees who have not saved enough during their working lives risk not only missing out on some of their retirement aspirations, but can also depend on their kids for financial support later in life.
The withdrawals generally result in her having insufficient capital at retirement to sustain a reasonable standard of living. A withdrawal also reduces the tax-free amount available when she retires.
While it is tempting to focus on the short-term financial benefits of your withdrawal, your delayed gratification will pay off at retirement.
Planning with your financial adviser is the only way to ensure that all options and potential implications are considered.
Retirement planning must allow for your specific circumstances and must consider all your post-retirement priorities.
For more information contact: Inkunzi Wealth Group on 087-160-0018, or e-mail us at invest@iwgsa.co.za