Few recover after cashing in

EARLY WITHDRAWAL: RESIST THE TEMPTATION AND AVOID COSTLY TAX IMPLICATIONS

Very few pension investors recover to their original growth path after cashing in their pensions, but the pressures to do so are extreme.

Far too many South Africans cash in their retirement savings and spend them when they change jobs and chances are, they’ll never recover “lost” savings before they retire.

Mark Lapedus, divisional director for product development at Liberty says the workforce has become much more mobile than a few decades ago when people stayed at one job until retirement.

Benefit in cash

A Sanlam survey indicates 77% of members of retirement funds who withdrew early took some or all of their retirement benefit in cash.

While 63% used some of this cash to reduce debt, 33% also used some for groceries. Many retire with retirement savings accumulated at the last job they had.

Government’s retirement reforms, aimed at mandatory preservation of retirement savings in provident funds, have been thwarted by labour unions for many years.

“There is a concern around what will happen to people who are without a job. It may be a great worry as to what will happen to them when they retire. However, it is more important to worry about what will happen to them next week,” Lapedus says.

Beatrie Gouws, member of the South African Institute of Tax Professional’s personal income tax committee, says low contribution levels and a lack of preservation are responses to a stressed economic environment.

“Many South Africans are financially responsible for more than their immediate family. The benefits of compounding (preserving retirement savings) notwithstanding, the option to contribute substantially to a retirement fund, or to preserve upon resignation is often a luxury,” says Gouws.

Lapedus says the tax implications for withdrawals from pension funds, provident funds and retirement annuities before retirement are considerably harsher than at retirement age.

In South Africa the legal retirement age is 55 years, but most of the pension and provident fund rules stipulate 65 years as the legal age to retire from the funds.

The retirement tax table for early withdrawal allows for a tax-free lump sum of R25 000 compared to the table for retirement, which allows a tax-free sum of R500 000.

In terms of pension funds, it is mandatory at retirement to preserve two-thirds of the value in a retirement annuity.

Government reforms have been aimed at harmonising mandatory preservation for all funds (pension and provident funds). Members of provident funds are, however, currently still allowed to withdraw the full value of the fund at the time of retirement.

The benefits of not withdrawing before retirement include the tax relief given upfront (income tax deductions on contributions) and tax-free growth.

It is only when one takes income from retirement age onwards that one will be paying income tax on the amount of income.

People contributing to retirement annuities can retire from the fund at the age of 55.

This article is brought to you by Liberty Agile.