Rule No 1: stay invested
IS FUNDING STUDIES A GOOD ENOUGH REASON?
Question: I am 39 years old and have worked for the public service for just over 11 years. I am considering resigning because I want to further my studies. My retirement fund value is R947 113. How much will they tax me if I take this out and how best can I invest it?
Answer: The short answer is you will be paying R191 820.51 tax on a retirement fund value of R947 113 – 20.25% of your retirement benefit will be paid to the South African Revenue Service (Sars).
Your capital will be taxed on a sliding scale. The first R25 000 is tax-free, the next R635 000 will be taxed at 18% and the balance will be taxed at 27%. Although not relevant here, any amount over R990 000 would be taxed at 36%.
You can avoid this tax entirely by transferring the benefit to a preservation fund.
A preservation fund works like a retirement fund, except that you don’t have to keep contributing. You will be able to make one withdrawal before retirement, but otherwise you won’t be able to access the money until you turn 55.
Once you retire, the first R500 000, less any amount you have already withdrawn, is tax-free. At this point you can withdraw up to one third of the capital as a lump sum, but the rest must be used to arrange a monthly retirement income. You will be taxed on your monthly income according to Sars income tax tables.
If you withdraw your retirement capital now, the R500 000 tax-free retirement benefit will fall away. So you will be suffering a double tax penalty.
Important differences between a preservation fund and cashing out now: In any retirement product, no annual taxes are paid on interest or dividends. With an investment, the interest received will be taxed and you will liable for dividend withholding tax. You will also pay capital gains tax should you withdraw money. If you withdraw the funds now, you will have easy access to your money. A preservation fund allows only one withdrawal. The Pension Funds Act has prescribed limits for different asset classes which are the building blocks of the underlying investment funds. The purpose of the limits is to contain the investment risk of the underlying investment funds.
But this limits the potential upside of your investment. Any investment under the Pension Funds Act can have a maximum of 75% in equities and 25% offshore. With easy access to discretionary investments, a lot of discipline is required not to use the funds unwisely.
Finally, my advice would be to leave it in your retirement pot. It will take quite some effort to replace the retirement capital you have built up.
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