Is cashing in your pension a good idea? Find out with our calculator

Thinking of resigning from your job in the near future?

The answer to that question is always: “Of course, who isn’t?”
Why stay in one job for the rest of your life?

Some of us are already such pros at this; we simply hand in our resignation and say, “I’m outta here.”. The only hassle is deciding what to do with your pension or provident fund.

So what then are your options at resignation?

Basically, you have four options:

  • Take the cash, or a portion thereof, and pay the tax on whatever you take
  • Transfer the fund tax-free into your new employer’s fund
  • Transfer the fund tax-free into a preservation fund, or
  • Transfer the fund tax-free into a retirement annuity

Today we’re only looking at option one – taking the cash.

So what happens when you take the cash?

It’s a mixture of good and bad news – more bad than good.

The good news in 2015 is that you’re allowed to take out R25,000 without paying any tax. The bad news is:

  • Anything taken between R25,001 and R660,000 is taxed at 18%
  • Anything between R660,001 and R990,000 is taxed at 27%
  • More than R990,001 and you pay a whopping 36% on this amount

So let’s say for example you take out R900, 000.

  • On the first R25,000 you would pay no tax
  • On the difference between R25,001 and R660,000 (which is R634,999) you would attract tax at 18% – that’s R114,300 tax
  •  On the difference between R660,001 and R900,000 (R239,999) you would pay tax at 27% – R64,800.
  • In total you would pay R179,100 in taxes.

Don’t worry about the maths! Download this great resignation tax calculator and it will do the sums for you.

Okay. Now that you know how much you’re in the hole for, you’re faced with a choice – today’s pleasure or tomorrow’s pain.
Let’s be honest, most South Africans are over their heads in debt. There’s more month at the end of each month than money, and wouldn’t it be great to have some breathing space for a change?

“Hmm, imagine if we owed nothing on the car…?”

Taking R70k from your pension fund to settle the car sounds so easy. After all, what’s R70k? You’re still young and have plenty of time to save for retirement, right?

But here’s another way to think of it

Let’s scrap retirement completely. Yip, you heard right.

  • You’re an adult,
  • You’re responsible,
  • You know you have to save.

And so I won’t lecture you on retirement.

So, how do you feel about giving money away?

Now stick with me here. Open up the calculator I sent you (You can fiddle with the three yellow blocks on top and fine tune it to fit your scenario).
Is it open?

  • Imagine for a moment you’re taking R250, 000 out. Do you see the amount in red at the bottom? That’s R40, 500 you’ll pay in tax
  • Now let’s say your monthly contributions to the fund were R2, 000 from your side and R2, 000 from your employer.
  • If we then divide the R40, 500 by the R4, 000, it’s telling us you’re giving 10 month’s worth of money you’ve saved to the taxman!

The question you now need to ask yourself is:

“How will you make up those lost savings?”

After all, you can’t add 10 months onto your retirement date, can you?

“Yeah but I’ll get a job earning double what I’m currently earning. It’s easy to make up.”

That might be so, but you’ve still lost 10 months which you’ll never get back. By all means get the job earning double, but imagine if you still had the previous 10 month’s worth of contributions to add to the double portion you’ll be putting in from now on?

Let’s look at it another way. Imagine you’re trying to clear some car debt…

  • Let’s say you financed a car in January 2014 for R250,000.
  • You bought it over 60 months at a fixed rate of 12% per annum and
  • You still owe four years on it.

After 1 year of paying you will still owe the bank R211,177 on the loan. During the year you’ve owned it, you would have paid R27,910 in interest to the bank.

Click on image below to enlarge if you want.

Car repayment schedule

Now you decide to cash in your pension fund to improve your cash flow. You decide to pay the R40, 500 we discussed above in taxes.

What’s just happened?

You’ve just given away R68,000 for the privilege of owning a car which is losing value day by day. To make your money back you’d need to sell it for:

  • The amount you still owe the bank – R211,177
  • The interest you’ve already paid the bank – R27,910
  • The tax on your pension fund – R40,500
  • Total – R279,587
  • Problem is the car has a retail value of R200,000 with trade in being even less.

Besides this let’s be honest, you’re going to buy a new car in a year or so’s time anyway, and then you’re back to square one.

Think carefully before doing this

It’s so easy to do but it’s going to cost you time and money. The money you can make back but the time you can’t. Take your time before making a decision. If you’re under pressure to move the money, then seriously consider a preservation fund option until you decide.

What have you done in the past with your pension or provident fund? Participate in our poll below.

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