Making good choices when exiting a retirement fund
Despite all the warnings, early withdrawals remain one of the main reasons most South Africans are not able to maintain their standard of living in retirement. In fact, more than 60% of South Africans opt to take their retirement savings in cash when changing employers. When one considers that conventional wisdom suggests that a retiree should have saved at least twelve to fifteen times his or her annual salary at retirement, the danger of this practice is really driven home.
At retirement, the following options are available to retirement fund members:
- Preserve savings in current fund (despite leaving the employer) with no tax payable
- Transfer savings to new employer’s fund, with no tax payable
- Transfer savings to a preservation fund or annuity, with no tax payable
- Take a portion in cash, currently taxed as follows:
R25 001-R660 000
R660 001-R990 000
R990 001 and above
The decision that is made at this point is irreversible. The amount of R25 000 taxed at 0% is available once-off, and any subsequent cash withdrawals from other retirement funds may be taxed in full if the tax-free amount was used up in previous cash withdrawals. Cash withdrawals will also have an effect on the tax-free amount available on retirement.
Bearing all of this in mind, it is absolutely crucial that existing fund members be guided to make financially wise choices. It is for this reason that the following new regulations (among others) for retirement funds came into effect on 1 September 2017, with a compliance deadline of 1 March 2019:
As mentioned above, when a member resigns and no longer contributes to the employer’s retirement fund, he or she will now become a paid-up member unless other instructions are given in writing. This default makes it easier for money to be preserved for the future.
Retirement funds are required by legislation to provide members with access to a benefits counselor before withdrawing from their fund. The counselor needs to ensure that the options available to the member are clearly and simply explained, to ensure that he or she is able to make an informed and responsible decision.
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The information in this communication is for information purposes and is not intended to be detailed advice described in the Financial Advisory and Intermediary Services Act. The fund, administrator and trustees cannot be held liable for damage or loss suffered as a result of any action that you take based on the contents of this communication.