• Denver Keswell

Don’t sabotage your retirement savings – It’s easier than you think

Five years ago, we wrote an article about the Effects of early withdrawals on retirement saving.

Despite many financial advisors commending us for highlighting the risks of accessing retirement fund savings prior to reaching retirement, it is somewhat surprising how many retirement fund members still access their retirement benefits before retirement without fully understanding the effect of such withdrawal from a tax point of view.

In the previous article we mentioned the obvious effect of an early withdrawal being the reduction on your retirement savings and therefore your ability to provide a sustainable alternative income after your retirement.

However, there is also a lesser-known effect (also mentioned in the article), which is how you are penalised from a tax perspective when you decide to access your retirement benefits prior to retirement.

The tax-effects of early withdrawals

As previously mentioned withdrawal benefits taken in cash after 1 March 2009 have the net effect of reducing your tax benefits at retirement.

If you take R100 000 as a withdrawal benefit when you resign from employment, then this means that the R500 000 tax free portion (see table below) on your lumpsum that you would have received at retirement would be reduced by the R100 000 withdrawal, leaving you with R400 000 tax free.

Had you previously taken R500 000 as a withdrawal then none of your cash lumpsum taken at retirement would be tax free, this despite the fact that only R25 000 of the R500 000 taken was actually tax free. Worse still is that if you had taken R1 050 000 or more as a withdrawal prior to retirement, this would in effect mean that any lumpsum taken at retirement will be taxed at the maximum rate of 36%.

In real life: How early withdrawals sabotage retirement savings

Liam resigns from employment on 01/06/2015 and was a member of his employers’ retirement fund. He is contemplating either taking R1 050 000 as a lumpsum or simply preserving all of his retirement savings. Let’s look at the consequences of both decisions from a tax perspective:

Liam then retires from his current retirement fund on 30 June 2019. Let’s look at the effect of his earlier decision in 2015 on tax payable on his current lumpsum at retirement: