You have spent your entire career investing for your retirement. When the time comes, you will have to consider how to get the most bang for your buck.
If you have a provident fund, the full amount can be taken as a lump sum, whereas you can take only a third if you belong to a pension or retirement annuity.
In both cases, the more important question is not how much you can take, but how much you should take.
Answering the following questions will help you to decide:
Q: So you have outstanding debt?
Ideally, all your debt should be paid off by the time you retire. If you still have debt, you should try to pay off as much as possible to free up your cash flow and give you more spending money every month. Also, as you probably are paying more interest on debt than you will earn on an investment, it’s better to pay off debt first.
Q: Do you have an emergency fund?
Your emergency fund can help you to pay for unexpected expenses, whether large or small, without having to borrow money. It is advisable to have at least three times your monthly expenses in an emergency fund.
Q: Will you need cash for new projects?
You might want to use some of your savings for a project you are passionate about and it’s usually best to focus on something that will create lasting value. The decision will ultimately depend on the amount you have in your retirement fund and in other investments.
Q: How much tax will you pay?
The tax you will pay on your 1/3rd lump sum at retirement is worked out according to a sliding scale.
Amount taken as a lump sum and the tax due
For example, if your total retirement savings equal R4 million and you decide to take the full amount in cash (if it’s a provident fund), the tax will be R130 500 plus R1 062 000 (36% on the amount above R1 050 000), leaving you with R2 807 500 instead of R4 million.
Also remember that if you have previously received a retrenchment benefit or more lump sums from your fund, they will be added to the amount you want to take when you retire when calculating the tax. Withdrawing a lump sum earlier therefore will not help you to avoid paying tax on it.
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Author: Henri Le Grange
HENRI LE GRANGE is a Certified Financial Planner® and his practice was named the 2019 Old Mutual Personal Financial Advice Practice of the Year. In 2018, he was in the top five in the Financial Planning Institute of South Africa’s Financial Planner of the Year awards.