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A News24 Business reader who resigned from her job with R300 000 accumulated in her retirement fund wants to know if she should access some of her funds or if it would be best to transfer it to her new employer's retirement fund. She writes:
I resigned from my job at an insurance company in December 2021, and during my three years and 11 months working there, I accumulated +-R300 000 in my retirement fund. I am disappointed with its growth. However, I also was not earning much at the time.
I am a 37-year-old woman and recently purchased an apartment (my first property, which I bought at age 36). I need to work on the bathroom and kitchen of my home, and I am contemplating using a maximum of R100 000 for the renovation. Is this a good idea?
There are also tax implications if I access the funds now. Is there a way to estimate these costs? Does it make sense? Or should I take the money and deposit it into my bond? Of course, the other option is to leave it where it is or transfer it to my new employer.
The other goal I have in mind is to rent out my apartment in the near future and move into a simplex. How do I work towards this goal, and won't the impact of the above decision affect this dream? This is a big decision for me, and I need to make a sound decision. Please help.
Nicole van den Munckhof, a Certified Financial Planner® at Independent Securities, responds:
Unfortunately, we cannot give you specific advice without a complete needs analysis. However, we can provide some general information and tips.
The scenario presented consists of three areas of consideration.
Firstly, what are your options concerning your share of your previous employer's retirement fund?
Secondly, should you use the withdrawn funds to renovate your kitchen and bathroom or pay off your bond a little faster?
And thirdly, you would like to rent out your apartment and purchase a simplex.
Regarding your question of what you should do with your retirement savings from your previous employer. The following options are available to you:
1. Keep your benefit in your last employer's funds as a paid-up member. Be sure to understand the underlying investments and cost structure. You will be eligible to retire from the fund once you reach the fund's retirement age. There are no tax consequences if you remain in the fund.
2. Transfer the benefit to your new employer's retirement fund. This solution is feasible provided your new employer has a retirement fund and that the fund can accept the transfer. The transfer would not attract tax.
3. Transfer the benefit to a preservation fund. In this option, you are free to make your own investment choices, although your investment strategy would need to be Regulation 28 compliant. It is always advised to partner with an adviser or financial planner who knows and understands your unique circumstances and risk appetite. Unfortunately, while a preservation fund allows you to preserve your retirement capital, it does not allow you to make additional contributions to the fund. The transfer would not attract tax.
4. A tax-free transfer of the benefit to a retirement annuity fund. Again, you can make your own investment choices, although your investment strategy must be Regulation 28 compliant. You will also be able to make additional contributions on a regular or ad hoc basis. The transfer would not attract tax.
5. As mentioned in your question, the last option you have is to withdraw the benefit. The withdrawal is a taxable event, and the fund will pay you the net after-tax benefit.
Retirement fund lump sum benefits consist of lump sums from a pension, pension preservation, provident, provident preservation, or retirement annuity fund on death, retirement, or termination of employment due to attaining the age of 55 years; sickness; accident; injury; incapacity; redundancy or termination of the employer's trade.
SARS taxes lump-sum benefits on an aggregate basis. When determining the tax on a current lump sum, SARS considers all previous lump sums taken. Withdrawals before the age of 55 years are taxed more aggressively. Therefore, if you withdraw your benefit now, this decision will follow you for the remainder of your life and will be considered for each subsequent withdrawal.
Assuming you have not previously withdrawn from a retirement fund and that you withdraw the full R300 000 from the fund in question, you will only receive a net benefit of R250 500. The tax on the withdrawal will be R49 500. The effective tax rate on the withdrawal is 16.5%. To provide you with a different perspective, that is seven months' worth of retirement savings that you will pay away in tax, assuming you saved the R300 000 over the 47 months of employment. Should you take the after-tax cash lump sum, you would like to know if upgrading your apartment would be better or using the proceeds to pay off your bond faster. We will speak in general terms as we do not have all the details regarding your current bond, monthly income, or loan interest rate.
Regarding the renovation of your current property, it is essential to consider the following:
1) Will the renovations add to the value of the apartment and increase the monthly rental income should you rent out the property?
2) Are the renovations of such a nature that the cost can be capitalised on the base cost of the apartment? It is essential to consult with a tax consultant before making the decision.
As a rule, it is always important to try and reduce your debt as quickly as possible. With global inflation at record levels and interest rates being adjusted upward to combat such inflation, your interest payable on your current bond is also likely to increase. Therefore, paying off that debt as quickly as possible is essential as you can materially reduce the overall interest paid on the loan.
When considering your future goal of owning a simplex, it is essential to consider the following:
1) Are you realistic about the rental income you will likely receive for your apartment, and how will the two bond payments affect your monthly budget?
2) Have you considered the additional costs that come with owning a property, such as the additional levies, rates, and taxes and maintenance?
3) Be sure not to overextend yourself when buying a second property, especially given the increase in interest rates. The last thing you want to do is put undue stress on yourself by being unable to pay your monthly instalments, especially during periods when you do not have a tenant.
In conclusion, it may seem appealing to withdraw from your retirement savings when changing employers. However, given the tax burden of the withdrawal as well as the fact that SARS aggregates all withdrawals, it is usually ill-advised to take the cash lump sum.
Furthermore, inherent to the success of long-term investing is having a long-term horizon and allowing time to compound the value of your investment. If you withdraw early from your retirement investments, it is tough to make up the value of the withdrawal. The mistake, rather than the investment, compounds over time, leading to potentially not having saved enough for retirement.
Good luck with your decision; it is always best to seek advice from a professional adviser who understands and appreciates your specific needs, circumstances, and risk profile.
Questions may be edited for brevity and clarity.
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