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Why is it a bad idea to withdraw from my retirement fund when leaving an employer?
Key takeaways
Withdrawing your savings from your retirement fund when you leave an employer:
- Robs you of compounding growth over many years and jeopardises your chances of a good income in retirement.
- Will probably cost you more in tax than a withdrawal at retirement.
- Could cost you when you reach retirement as the amount you can take tax-free will be reduced by any withdrawals you made from your vested pot before retirement.
- Could reduce the cash lump sum you are entitled to at retirement if you withdraw from either your savings pot or your vested pot.
If you resign, are fired or retrenched, you can withdraw the amounts you have saved in your vested retirement pot and the savings pot of an employer-sponsored retirement fund or umbrella retirement fund.
This is not a good idea for four very important reasons:
1. You rob yourself of your future income
Not preserving your savings for retirement will severely compromise your ability to provide a good income for yourself in retirement.
In order to have enough savings in retirement, you have to save over long periods and harness the power of compound interest over that time. Your contribution rate is typically designed together with the rate of growth and your expected working life to provide a reasonable percentage of your income at retirement - known as your income replacement ratio.
Drawing out your savings, at any age, compromises this plan and you will rob you of a good income in retirement unless you catch up. This will be harder to do if you are older and closer to retirement as you have less time for your savings to compound.
To catch up what you have drawn out, you will need to save high percentages of your income which will compromise your living standards.
2. The tax is higher on savings withdrawn
The tax you will pay on money you withdraw if you resign or are fired is much higher than what you will pay if you only take the money on retirement.
| HOW WITHDRAWALS FROM A RETIREMENT FUND ARE TAXED | |
|---|---|
|
1. Add any previous withdrawals taken after March 2009, any retirement lump sums taken since October 2007 and any severance benefits taken since 2011. 2. Apply the relevant tax and rate from this table to the amount calculated in step 1. 3. Add the amount you plan to withdraw this time to the sum calculated in step 1. 4. Apply the relevant tax and rate from this table to the amount calculated in step 3. 5. Subtract the tax calculated in step 3 from the amount calculated in step 4. |
|
| R0 - R27 500 | 0% |
| R27 501 - R726 000 | 18% of the amount above R27 500 |
| R726 001 - R1 089 000 |
R125 730 + 27% of the amount above R726 000 |
| R1 089 001 and above | R223 740 + 36% of taxable income above 1 089 000 |
| Source: Budget 2026 Tax Guide | |
The reason for this is if you withdraw from the vested pot, you will only be allowed to take, at most, R27 500 tax free.
If you have taken a withdrawal before, you may have used some, or all, of this amount already. You only enjoy this tax-free amount once in your lifetime no matter how many funds you belong to.
Thereafter the tax rate you pay is tiered and depends on how much you withdraw. It starts at 18% but can be as much as 36% for amounts you withdraw in excess of R990 000.
Although the tax rates that apply are the same as those that apply to lump sums taken when you retire, the initial tax-free amount is much lower than the R550 000 allowed at retirement, resulting in higher tax rates applying sooner.
If you withdraw money from your fund in order to save it in another non-retirement fund investment, remember that that investment may not enjoy the tax-free growth as is the case with savings in a retirement fund, unless you use a tax-free savings account.
If you withdraw from your savings pot on resignation or dismal from your job, your withdrawal will be added to your taxable income and taxed at your marginal tax rate.
3. Vested pot withdrawals count against you at retirement
Whatever money you take out of your vested pot of your retirement fund before retirement, will count against you at retirement and reduce the R550 000 you are allowed to take tax free at retirement.
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Your employer-sponsored fund is required by law to offer you Any withdrawals you have made previously are added to any lump sum you take at retirement, which means the tax rates are incrementally higher.
This means if you take R300 000 as a withdrawal before retirement, you will only have R250 000 of the tax-free allowance left at retirement. This is the case even though only R27 500 of the R300 000 you withdrew was tax free.
4. Cash lump sum at retirement is reduced
Withdrawals from your vested and savings pot will reduce the amount of cash you can withdraw at retirement. At retirement you must use what is in your retirement pot and two-thirds of what is in your vested pot to buy a pension or annuity.
If you have withdrawn from your vested pot and your savings pot, you will only have what is in your retirement pot to provide you with cash you may need at retirement. Read more: Does withdrawing from the savings pot affect my cash lump sum at retirement?
If you are retrenched
If you are retrenched, you must be paid a severance benefit of at least one week for every completed year you have worked continuously. This is in terms of the Basic Conditions of Employment Act. Read more: How can I minimise financial losses after retrenchment?
You can make use of the R550 000 that you are entitled to take as a tax-free lump sum at retirement against any severance pay and lump sums withdrawn from your vested pot of your retirement fund on retrenchment.
Remember, however, that you only enjoy the R550 000 once, so if you use it all on retrenchment, you will not enjoy any tax-free lump sums at retirement.
If you are not able to find work and do not have any other sources of income you may not have a choice but to use this tax break early.
RA members can only withdraw from the savings pot
You can only withdraw money from your savings pot of your retirement annuity. You cannot withdraw from the vested or retirement pots before age 55 unless you:
- Have not been resident for an uninterrupted period of three years or longer since March 1, 2021 or you emigrated before this date and your emigration was recognised by the South African Reserve Bank;
- Qualify for an early retirement as a result of a disability; or
- You stop contributing and you have less than R15 000 in your retirement annuity.
