Page 24 - Waterfall Issue 9 2021

Waterfall News

Note that any amount taken as a cash lump sum will Your retirement funds can be transferred either to:
be taxed according to the retirement lump sum tables, • your new employer’s qualifying retirement fund
together with any severance benefits or retirement lump • a preservation fund (i.e. PSG Wealth Preservation Fund)
sums taken before, whereas any amount transferred to • a retirement annuity (i.e. PSG Wealth Retirement Annuity)
an approved retirement fund will be transferred tax-free.
If Lisa had transferred her pension fund value of
You will need to carefully assess your different options R2 650 000 to an approved retirement fund instead
and how they can affect your retirement savings. of cashing it out and paying taxes, the difference
It is important to consider not just your immediate towards her savings for her actual retirement over the
circumstances but also your long-term plans. long term would have been significant (more than
R2,5 million). Comparing the two actions, the difference
understanding the tax implications of in savings at retirement can be depicted as follows:
withdrawing from your retirement fund
Let’s have a look at a practical example. Lisa (50) Cashing Preserving
has just been retrenched and received a severance out, paying retirement
benefit of R600 000. She also has a pension fund additional funds
valued at R2 650 000. Lisa is in the unfortunate taxes and then
position of not having an emergency fund or any saving for
other savings and has no guidance as to what she retirement
should do with her retirement benefits or how to Investment value at R2 650 000.00 R2 650 000.00
proactively regain control over her situation. She retrenchment (age 50)
opts to take the full value as a cash lump sum. Taxes R706 500.00 Tax free
Fund value to invest R1 943 500.00 R2 650 000.00
The total cash lump sum taken amounts to for retirement
R3 250 000 (being the severance benefit of R600 000 Fund value at retirement R7 079 164.66 R9 652 578.52
and the pension fund value of R2 650 000) and will be (age 65) (investment
taxed according to the retirement tax lump-sum table: growth of 9% p.a.,
with no additional
Taxable income from lump- Rate of tax contributions)
sum benefits
Not exceeding R500 000 0% Practical tips for rebounding from
Exceeding R500 001 but 18% of taxable income retrenchment
not exceeding R700 000 exceeding R500 000 • Proactively take control and reassess your position:
Exceeding R700 001 but R36 000 plus 27% of taxable • Review your monthly budget – make a list of your
not exceeding R1 050 000 income exceeding R700 000 expenses and assess what you can cut back on.
Exceeding R1 050 000 R130 500 plus 36% of taxable • Readjust your financial and savings goals, even if it is
income exceeding R1 050 000 just for a short time. Evaluate what you have saved
and see how you can adjust specific future goals.
Lisa will pay tax of R922 500 and only receive • Re-evaluate your skillset and ability to find a
R2 327 500 in her pocket. The tax is something Lisa new job. Then plan your next steps to start
could have avoided or limited if she had preserved earning an income to continue saving.
her retirement fund value by transferring it to an • Make sure you have a trusted sounding board. Speak to
approved retirement fund. With the necessary your financial adviser for guidance and valuable input on
guidance, Lisa could have proactively planned her the different options available to you at retrenchment.
next steps going forward without making a large • Use your retrenchment package wisely. Instead
withdrawal from her retirement savings. She could of spending it all, consider saving a portion for
have rather used her severance benefit to cover another rainy day. Maintain your emergency fund
her expenses during the uncertain period. and stick to your long-term savings goals.
• Should you consider using your funds to start a new
Preserving your retirement savings business, only do so if you have done proper research
Ideally, you should try not to dip into your retirement and discussed this with a business mentor/coach.
savings for unforeseen events but instead use your Not all of us are natural entrepreneurs, and starting a
emergency fund. By not taking a lump sum in cash, you business out of panic could lead to a further downfall.
avoid paying additional taxes, preserve your savings for • Have a plan. The famous saying goes:
your actual retirement and stick to your savings goals. “If you fail to plan, you plan to fail.”

22 Waterfall Issue 9 2021