What Can I Do With My Company Pension Fund Money If I Resign?

This one’s easy, right…? Cash it in, pay the tax, and settle your debt.
Well, it’s one of your four choices, but truth be told, it’s easily the worst of the bunch. Here are your options from bad to best.

Option One – Cash in your pension

There’s a lot of things you could do with all that money lying around in your pension fund. For instance, you could:

• Pay off your bond
• Buy a car cash
• Put down a deposit on a home

But doing so isn’t always advised and the reason why is because of tax. Yes, it’s true; if you want to cash in your pension, the government wants their share first.

In 2018 the tax calculation, when resigning, works like this:

• The first R25,000 is paid out to you tax-free
• Anything you withdraw over R25, 000 and which falls below R660, 000 is taxed at 18%. In other words, you could pay up to R114, 300 in tax if you withdraw R660, 000.
• Cashing in anything over R660, 000 and up to R990, 000 attracts tax at 27%. Withdraw the full R990, 000 and you’ll get hammered with R203,400 in taxes.
• Cashing in anything over R990,000 means a whopping 36% in tax.

So, let’s assume you withdraw R660, 000 and pay the R114, 300 in tax.

• After paying the tax you’d be left with R545, 700 in your pocket.
• Now assume you contributed R5, 000 a month to the pension fund.
• R114, 300 in taxes divided by R5, 000 (monthly contribution) gives us 22.86 months’ worth of contributions.  Think about that – It’s almost two years’ worth of retirement savings going down the drain.

There’s no way you will ever make up those two years. It’s not as if you can’t tell your boss you won’t be retiring at 65, and that you’ll be working in the extra two years to catch up on your pension.

Option Two – Transfer your money to the new company’s pension fund

This has one benefit, namely that the transfer takes place without you having to pay any tax on the transfer.
Another benefit might be that the new pension fund gives you a wider choice of investment funds to choose from than what the old one did. Of course, the opposite could also be true.

One disadvantage and something you should investigate before going this route is the ongoing investment costs relating to the new pension fund. You don’t want to invest money in the new pension fund when their costs are higher than with your previous pension fund.

Option Three – Transfer it into a Retirement Annuity

This option also has the benefit of taking place without you having to pay a cent in tax, when transferring.

Another benefit is that you may withdraw an amount in cash while transferring the balance into a Retirement Annuity. The portion taken in cash will be taxed if it exceeds R25, 000, while the portion being transferred to your Retirement Annuity happens tax-free.

Many investment firms will also allow you to continue to contribute monthly towards the Retirement Annuity, but be warned that some won’t.

One disadvantage with a Retirement Annuity is that you can’t cash it in until you reach retirement age, so expect to stay invested until at least age 55. Yes, there are a few exceptions to this rule, but none worthwhile considering.

Option Four – Transfer your money to a Preservation Fund

This one ticks all the right blocks. For instance, it allows a tax-free transfer of your pension fund into the preservation fund.

It also allows a once-off withdrawal from your pension fund prior to it being transferred to the preservation fund much the same as the Retirement Annuity option.

Its major advantage over the first three options is that it allows you a once-off withdrawal while in the preservation fund, and prior to retirement age. In other words, you can withdraw up to the full amount before retiring. But remember that this withdrawal is taxable.

The one disadvantage is that you can’t make monthly contributions toward the preservation fund. You also can’t invest additional pension monies from other funds into the same investment. Each pension fund must have its own preservation fund.

Conclusion

The preservation fund makes the most sense. That’s because a preservation fund offers you:

• A tax-free transfer between your existing fund and your preservation fund
• The option to make one resignation withdrawal before transferring your money into the preservation fund
• The additional flexibility of allowing one more resignation withdrawal from within the preservation fund and prior to retirement

Of course, there’s one further option…don’t resign. But that was never an option anyway, was it?

Until next time.

The Wise About Life Team.