So I get this interesting financial planning email just the other day:
“I heard that I will get R300, 000 out tax-free from my provident fund if I resign, is that true?”
Problem is it’s too good to be true! R315, 000 is tax-free BUT…it only applies when you retire. Resignation is a completely different animal.
The truth is that only the first R22, 500 of your pension or provident fund is tax-free at resignation.
“So how much tax would I pay if I want to withdraw some or all of my pension in cash?”
Let’s round your pension or provident fund off to exactly R1 million. Here goes:
- Only the first R22, 500 is free of tax
- Any amount exceeding R22, 500 but not exceeding R600, 000 is taxed at 18%. We’re talking about an amount of R577, 500 (R600, 000 – R22, 500 = R577, 500) being taxed at 18%. That’s R103, 950 payable in taxes should you withdraw R600, 000.
- The amount between R600, 000 and R900, 000 is taxed at 27%. That’s R300, 000 (R900, 000 – R600, 000) taxed at 27% which means R81, 000 in tax. Add this to the first R103, 950 already owing and it amounts to R184, 950 in tax if you withdraw R900, 000.
- Any amount exceeding R900, 000 is taxed at 36%. In our case we’re talking about R1 million. So R1 million less the R900, 000 = R100, 000 taxed at 36% which means another R36, 000 in tax. Add this to the R184, 950 already payable and we have a cool R220, 950 owing to SARS.
But before you withdraw your pension in full, think about this for a minute…
Imagine you’ve spent 15 years of your life building up this R1 million. Now do the following math:
- Divide the R1 million by 15 years. That’s R66, 666 invested for each of the past 15 years.
- Now take the tax bill of R220, 950 and divide it by the R66, 666. We’re talking about more than 3 years worth of savings.
Are you really willing to give SARS R220, 950 of your own money simply because they’re kind enough to allow you to withdraw R779, 050 of your own money?
It’s also not money you can ever make back. If you wanted to make back the lost R220, 950 it would mean for the next 3 years you’d have to invest R6, 000 a month. Catching up the past 3 years also means you’re falling behind on the current 3 years – you’ll have to double up the R6, 000 and make it R12, 000 a month.
But you and I both know that anyone who intends to take his full pension in cash, isn’t planning on investing the rest. They’re going to use all of it to settle debts or buy that new car. They’re actually planning on flushing 15 years of retirement savings down the toilet bowl. They have now moved their retirement goals out by a further 15 years.
What if you need other options besides paying the tax?
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Until next time.
The InsuranceFundi Team