By Cindy Wilson, Director of Employee Benefits and Peter Harten, Financial Planner - BDO South Africa
The new changes in pension legislation, which will come into effect on 1 March 2016, has created confusion in the minds of people about the difference between Retirement and Withdrawal from these pension funds.
Pension funds include Provident, pension and retirement annuity fund
Withdrawal means to leave your employer and its pension fund before your normal retirement age. When you do this, you are allowed to take your full investment value in your pension fund as a cash amount. If you don’t want a cash amount or only want a portion of your benefit as a cash amount you can transfer the portion that you do not put into your pocket into another pension fund, tax-free, to be used at a later date.
Retirement means to retire from your employer, at your normal retirement age, in terms of your employment contract. When you Retire, your benefits are taxed less than when you Withdraw.
The government has not changed the law to prevent you from leaving your employer and withdrawing cash from your fund. The only exception to this is where you are in an Industry fund and you are unable to take your benefit in cash unless you leave the Industry.
When you take your Withdrawal benefit in cash, you will have to pay tax, as follows:
- if you take a Withdrawal benefit of Rand 500,000 from your pension fund you will pay tax of Rand 85,500 when you leave your employer
- if you take Rand 1 050 000 cash, you will pay tax of Rand 225 000 when you leave your employer
When you take a Retirement benefit, you are only allowed to take a portion in cash and the rest of your fund must provide you with a monthly pension.
- If you take cash portion of Rand 500,000 or less you will pay No Tax at Retirement
- if you take Rand 1 050 000 cash, you will pay tax of Rand 130,500 at Retirement
Please take advice from your HR department or from your financial planner before deciding to withdraw or before you take your retirement benefits from your pension fund. These decisions are very important. BDO Wealth assist you in this regard.
If you want to be technical:
When you take a Withdrawal benefit in cash, you will have to pay tax, as follows:
- the first Rand 25,000 is tax free
- you will pay tax of 18% on the next Rand 635,000
- you will pay tax on the next Rand 330,000 at 27%
- and finally, any amount that you take out your fund over Rand 990,000 will be taxed at a very high rate of 36%
The benefit that you take in cash on Retirement is taxed as follows:
- the first Rand 500,000 is tax-free
- you will pay tax of 18% on the next Rand 200,000
- you will pay tax on the next Rand 350,000 at 27%
- any amount over Rand 1 050 000 will be taxed at a high rate of 36%