Your options on leaving your employer

If you resign, or are retrenched or dismissed, your membership of your retirement fund will come to an end. The retirement capital that has built up in your name will become payable to you. You have certain options as to what you can do with your retirement capital from your retirement fund. You should do your utmost to preserve your retirement capital, after all this money was intended for your retirement. You should also take steps to preserve the life, disability and medical cover that you currently enjoy.

TWO BASIC CHOICES

TRANSFER TO AN APPROVED RETIREMENT FUND You can reinvest your retirement benefit by transferring the entire benefit, tax-free, to another approved retirement fund such as: 1. A preservation fund 2. A retirement annuity fund 3. Your new employer’s fund

OR

CASH LUMP SUM You can choose to receive your entire withdrawal benefit as a taxable cash lump sum. You need to think carefully before choosing this option because it could significantly reduce your chances of having a comfortable retirement i.e. you may be tempted to spend what remains after tax rather than reinvest and keep your retirement capital intact for retirement.

 

Transferring your retirement benefit to an approved retirement fund is usually preferable to taking a cash lump sum because you are reinvesting your entire benefit tax-free.

WITHDRAWAL PAYOUT PROFILES COMPARED

		PRESERVATION FUND	RETIREMENT ANNUITY (RA) FUND	NEW EMPLOYER FUND
	Will my transfer be taxed?	No	No	No, unless it is from a pension fund to a provident fund prior to 1 March 2015.
	When can I access my money?	At any stage, however, after one withdrawal, the money is bound until you reach age 55	Bound until you reach age 55	Depends on new fund’s rules
	Can I make contributions after the transfer?	No	No	Yes
	How can I take my retirement Pension preservation fund:	Pension preservation fund: maximum 1/3rd in cash; remainder (2/3rds) as a monthly income; Provident preservation fund: no restriction on cash.	Maximum 1/3rd in cash; remainder (at least 2/3rds) as a monthly income;	Pension preservation fund: maximum 1/3rd in cash; remainder (2/3rds) as a monthly income; Provident preservation fund: no restriction on cash prior.
	Is estate duty payable?	No	No	No

 

CASH LUMP SUM

Not only is a cash withdrawal taxable, but you also lose the power of compound interest on the amounts withdrawn.

The following tiered tax table is used for resignation or dismissal:

	Withdrawal benefit (resignation/dismissal)	Rates of tax (R)
	R0 – R25 000	0%
	R25 001 – R660 000	18% of the taxable income above R25 000
	R660 001 – R990 000	R114 300 + 27% of the taxable income above R660 000
	R990 001 and above	R203 400 + 36% of the taxable income above R990 000

 

EXAMPLE

If you withdraw R500 000 on resignation, R25 000 will be “taxed at 0%”, and the remaining R475 000 will be taxed at 18%. Tax of R85 500 will therefore be payable, and you will only “take home” R414 500, after tax. You would have paid no tax had you transferred to a preservation fund. The following tiered tax table is used for retrenchment:

	Withdrawal benefit (retrenchment)	Rates of tax (R)
	R0 – R500 000	0%
	R500 001 – R700 000	18% of taxable income above R500 000
	R700 001 – R1 050 000	R36 000 + 27% of taxable income above R700 000
	R1 050 001 and above	R130 500 + 36% of taxable income above R1 050 000

 

If you are retrenched, the portion you elect to take in cash from your retirement fund, together with certain severance benefits paid by your employer, will be taxed according to the same table as that applicable to retirement or death. While this is a better tax scenario that that applied to withdrawals due to resignation or dismissal, this does not mean it’s necessarily a good idea to take the cash.

IMPORTANT NOTE

The tax you pay depends on the amount you take in cash. Retirement fund lump sum benefits are “aggregated” – which means that any “previous taxable lump sums” received on retirement (since 1 October 2007), withdrawal (since 1 March 2009) and severance benefits received upon retrenchment (since 1 March 2011) are added to the current lump sum to establish the “total taxable lump sum”. The above tables are then applied and a “hypothetical” amount of tax on the previous lump sums is deducted from the tax on the total lump sum in order to determine the tax payable
on the current lump sum.

Retirement benefits and retrenchment benefits enjoy up to R500 000 to be “taxed at 0%”, whereas for withdrawal benefits only R25 000 is taxed at 0%. Thus by way of aggregation, any excessive lumps sums taken will reduce the effect of these tax brackets by pushing the lump sum into the higher tax brackets at retirement. This is a very strong reason to refrain from taking cash withdrawal benefits prior to retirement.