Thank you for your question. I would like to start off by distinguishing between withdrawing from a fund and retiring from a fund.
People generally choose to withdraw from retirement funds when they are under the age of 55, in need of cash, and where they have no other discretionary investments to dip into.
Withdrawing from a retirement fund is a more expensive way of accessing your capital.
When you withdraw, you have access to 100% of the money in the fund. However, when withdrawing from a preservation fund, keep in mind that you only have one opportunity for withdrawal – after which you will need to wait until age 55 to retire from the fund.
On the other hand, you can retire from a fund from age 55 onwards.
With a pension preservation fund, you can take up to one-third in cash (which is what you mentioned you are considering) which, while still subject to tax, is not taxed as heavily as a withdrawal.
Having unpacked the difference between withdrawing and retiring from a pension preservation fund, let’s have a look at the tax differences which are best explained using an example.
Assuming you have not made a previous withdrawal from your fund, you will be permitted to make a withdrawal. However, if you have made other withdrawals from other retirement funds, the withdrawal amount will be aggregated for tax purposes.
If you have never made a withdrawal before, the tax table that will apply to your current withdrawal is as follows:
| Taxable income | Rate of tax (R) |
| R1 – R25 000 | 0% |
| R25 001 – R660 000 | 18% of taxable income above R25 000 |
| R660 001 – R990 000 | R114 300 + 27% of taxable income above R660 000 |
| R990 001 and above | R203 400 + 36% of taxable income above R990 000 |
No previous withdrawals: If you have made no previous withdrawals from a retirement fund, you will be taxed as follows:
(R700 000 – R660 000) * 27% + R114 300 = R125 100
This means you would be able to walk away with a net of tax amount of R574 900.
Previous withdrawals: This example serves to demonstrate how you will be taxed assuming you have previously made a withdrawal of R100 000 from a retirement fund. In such circumstances, your tax will be calculated as follows:
R700 000 + R100 000 = R800 000
(R800 000 – R660 000) * 27% + R114 300 = R152 100
You would also have paid tax on this R100 000 at the time of your withdrawal (if done after September 2009):
(R100 000 – R25 000) * 18% = R13 500
The R13 500 will be subtracted from R152 100, which will leave you with a tax bill of R138 600. You will have an after-tax amount of R561 400.
Am I entitled to the R500 000 tax-free allowance?
As you can see, the R500 000 portion that is taxed at 0% is only applicable when you retire from the fund and not when you withdraw from the fund. On withdrawal, only the first R25 000 lump sum will be taxed at 0%.
Can I leave the balance in the above fund?
You mentioned that you are currently age 55 which means that you should have the option to retire from the fund. Should you retire from the fund (as opposed to withdrawing), you will be able to take out one-third of the cash which is in line with your intention. The remaining two-thirds must be used to purchase an annuity. On the other hand, if you choose to withdraw from the fund, you will be permitted to leave the remaining balance invested in the fund.
The benefit of retiring from the fund is that the applicable tax tables are more favourable:
| Taxable income | Rate of tax (R) |
| R1 – R500 000 | 0% of taxable income |
| R500 001 – R700 000 | 18% of taxable income above R500 000 |
| R700 001 – R1 050 000 | R36 000 + 27% of taxable income above R700 000 |
| R1 050 001 and above | R130 500 + 36% of taxable income above R1 050 000 |
No previous withdrawals: This means that if this is your first lump sum from a retirement fund, your tax will be as follows:
(R700 000 – R500 000) * 18% = R36 000
You will have an after-tax amount of R664 000.
Previous withdrawals: If, for example, you have made a previous withdrawal of R100 000, your tax will be calculated as follows:
R700 000 + R100 000 = R800 000
(R800 000 – R700 000) * 27% + R36 000 = R63 000
You would also have paid tax on this R100 000 at the time of your withdrawal (if done after October 2009):
(R100 000 – R25 000) * 18% = R13 500
The R13 500 will be subtracted from R63 000, which will leave you with a tax bill of R49 500. This means you’ll have a post-tax amount of R650 500.
Since there is a major tax saving by retiring from the fund instead of withdrawing from the fund, it is important to understand what your options are with the remainder of the preservation fund.
You have the option to purchase a life annuity from an insurer, which will provide you with a fixed income for life, or you can purchase a living annuity from which you will need to draw an income of between 2.5% and 17.5% of the capital amount per year. Naturally, the lower the income drawn, the longer the investment will last, and nothing prevents you from reinvesting the 2.5% income that you receive from it.
It is important to note that the income received from such an annuity will be subject to your personal income tax rate, keeping in mind that the income might push you into a higher tax bracket. Should you retire from the fund, the income rand amount from the initial investment value (working on an amount of R1 400 000) will fall somewhere between R2 916 and R20 416 per month.
As is evident from the above, it is important to carefully consider the options available to you before making a decision on how to access the funds.
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