By Jeanette Marais, CEO of Momentum Investments
Cashing out your pension fund every time you change jobs may seem like a quick cash-flow fix in the moment, but in actual fact, it’s self-sabotage. Every time you borrow from the future, you jeopardise your financial wellness beyond retirement.
One thing many people do not consider is that withdrawing from your retirement savings prematurely not only reduces the tax-free lump sum you would get at retirement age, but also increases the tax rate for the money that you get when you eventually retire. Below is a table that shows how SARS calculates retirement withdrawal tax.
|Taxable lumpsum||Tax rate|
|0 – R25 000||0% of taxable income|
|R25 001 – R660 000||18% of taxable income exceeding R25 000|
|R660 001 – R990 000||R114 300 + 27% of taxable income exceeding R660 000|
|Exceeding R990 000||R203 400 + 36% of taxable income exceeding R990 000|
Say for example you decide to change jobs and cash out your pension fund with the current value of R500 000, you would get the first R25 000 tax-free and then pay 18% of the difference. 18% on R475 000 is R85 500, leaving you with R414 500. Some years later, you choose to withdraw an additional R550 000 and end up paying the taxman R139 500, bringing the total paid to SARS to R225 000. Had you chosen to only cash in at retirement age, your first R500 000 would be tax free, but because you withdrew before retirement, you effectively lose most of such exemption due to the aggregation. You would only have to pay R130 500 in tax. That is a whole R94 500 difference!
In essence, the more you cash out your pension fund, the more tax you will have to pay for each withdrawal, leaving you with less and less money when you retire.
Many people today are over-indebted and may feel that withdrawing their pension funds early to settle their debt will remedy the situation. To the contrary though, this option does not deal with the reason they are in so much debt to begin with – their lifestyle. Until you develop a healthy relationship with money, you will always fall victim to debt. It all boils down to putting a budget together and sticking to it. When you choose to use your retirement money to repay your debt, you are opting for the easy way out instead of addressing the real problem of living beyond your means. In this case, chances are that in five years’ time, you will be faced with the same predicament.
Only 6% of South Africans can afford a comfortable retirement. This is very concerning because it means that the vast majority of the population will have to rely on government grants or even family members for financial support at retirement.
Another important point to remember is that your healthcare needs change as you grow older and not having enough money saved when you retire means you will have to make other means to cover those costs.
The basic reasoning behind saving for retirement is to have some security when you no longer have a regular source of income. You spend your whole working life saving for the future because you want to maintain a certain lifestyle at retirement, keeping in mind that the cost of living is always on the rise. Never sabotage your wellbeing tomorrow for the sake of instant gratification today.