Beware of pre-retirement withdrawals from your pension fund

Johannesburg – The government recently announced that it may allow retirement fund members to make limited pre-retirement withdrawals from their retirement funds.

While the intention is to offer members short-term financial relief under very specific circumstances, it is important not to lose sight of the long-term nature of these investments and the generous tax breaks given for investing in them.

An investment in a retirement fund is a long-term commitment.

It allows you to amass a substantial chunk of money throughout your working life, resulting in a nest egg that should ideally only be accessed when you need it most – at retirement.

The taxman recognises the importance of retirement savings and offers savers tax breaks for doing this. Retirement funds are without a doubt one of the most tax-efficient ways to build up and manage your long-term savings.

There are three basic ways in which the taxman encourages you to save: First, the contributions you make to your retirement fund are tax-deductible, up to certain limits each year. This means that you pay less tax on your monthly earnings, while saving for your retirement. Second, the money you accumulate in your retirement fund will grow tax-free over time.

This means that the growth on your retirement savings, while in your retirement fund, will be exempt from income tax, capital gains tax and dividends tax.

And finally, when you retire, a portion of your retirement benefits may be tax-free. Benefits taken as a cash lump sum at retirement will be subject to the lump-sum tax tables, where the first R500 000 is tax-free and the balance will be taxed at preferential rates.

Any annuity you receive will be taxed at your marginal tax rate.

According to a recent National Treasury statement, the government is considering allowing retirement fund members limited access to their retirement benefits before retirement, but only in the case of emergencies or extraordinary circumstances.

It is proposed that members will build up two pots of money in their retirement fund – one pot for long-term savings and a second pot allowing members access for short-term financial relief.

A member who accesses their short-term savings pot before retirement may, however, be forced to preserve some of the balance of their benefits until retirement – even if that member leaves employment. The design and details of these proposals have not yet been bedded down and it is likely that we’ll only see these changes coming into effect next year, at the earliest.

So, before these announcements come into effect, consider the tax breaks you get on savings, the importance of your long-term goals and the impact early access may have on your retirement.

• Coutinho is senior tax manager at the Liberty Group.

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