Withdrawing your savings from your retirement fund when you leave an employer
If you resign, are fired or retrenched, you can withdraw your retirement savings from an employer-sponsored fund.
This is not a good idea for two 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.
Drawing out your savings, at any age, but particularly when you are older and closer to retirement, is most likely to rob you of a good income in retirement.
To catch up with 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 The tax is higher on savings withdrawn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 | |
|---|---|
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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. |
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| 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 2023 Tax Guide | |
The reason for this is if you withdraw, 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 R500 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 will not enjoy the tax-free growth as is the case with savings in a retirement fund.
3. Withdrawals count against you at retirement
Whatever money you take out of a 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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TIP: TAKE THE COUNSELLING
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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.
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 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’t withdraw
You cannot withdraw money from your retirement annuity before age 55 unless you:
Your employer-sponsored fund is required by law to offer you retirement benefits counselling to help you understand your choices when you leave an employer. This service is free and you should use it to understand your options better.