Retirement Fund Advice

[Zuner]

Hi Everyone

i'd like some input with regards to a retirement fund.

I recently resigned from my job, and have a retirement fund with the company through liberty.
Looking at the funds income i can clearly see its rubbish, and decided to withdraw the monies and put them together with my savings since that yields more interest.

However i lack the knowledge of the tax implications in doing so. I've heard from a few people that a person's first withdrawal of such funds has a tax break but that in turn screws up your future much larger withdrawal when the time comes.
The funds financial adviser was completely useless in assisting with this. My options are below in the screenshot.

So there was a submission issue which gives me the opportunity to change my mind.
Any recommendations ? I am not employed since i am studying so i cannot transfer to a new employer.

 

[bchip]

You dont transfer funds to a new employer, you transfer it to a fund manager.
In other words you dont need to be employed to have it invested.

Not sure what your asking as you seem to have answered your own question
on your options...

No one here can legitimately tell you what to do as you need to decide for
your own circumstances,
do you need the funds to survive the studies?
do you have other payments to make?
do you want to take the tax knock now or later?

 

[bchip]

This might also be relevant

http://www.sars.gov.za/Tax-Rates/Income-Tax/Pages/Retirement-Lump-Sum-Benefits.aspx


RETIREMENT LUMP SUM BENEFITS
Tax relief on retirement lump sum benefits is allocated once in a lifetime in other words if it’s used up you can’t claim it again. For example, if a person used R300 000 of the R500 000 with the first lump sum, the balance left is R200 000 and once this is used up this relief is not available again. For more details on how it works, read our Budget Tax Guide.

 

[jman]

I'd transfer the funds to a preservation fund from the info I can gather. Withdrawing retirement funds early is usually always a bad idea. Go with a low cost provider like 10x, Sygnia, Nedgroup (core series). Give them a call and they should be able to help you in terms of what's required from you

 

[Zuner]

You dont transfer funds to a new employer, you transfer it to a fund manager.
In other words you dont need to be employed to have it invested.

Not sure what your asking as you seem to have answered your own question
on your options...

No one here can legitimately tell you what to do as you need to decide for
your own circumstances,
do you need the funds to survive the studies?
do you have other payments to make?
do you want to take the tax knock now or later?

Just looking for advice on what is the better choice, i know things are different for each individual however sometimes the "correct" choice is so simple/obvious that it should be mentioned.
I Don't need the money at all. just want to make the better choice for it.
Don't mind taking teh tax knock now as long as it doesn't make things worse later on in life in terms of extra tax. ie, if i'm understanding the below correctly you get 500k tax relief in a lifetime, so whether i take the money now or later i'm the same off cause its still 500k.

This might also be relevant

http://www.sars.gov.za/Tax-Rates/Income-Tax/Pages/Retirement-Lump-Sum-Benefits.aspx


RETIREMENT LUMP SUM BENEFITS
Tax relief on retirement lump sum benefits is allocated once in a lifetime in other words if it’s used up you can’t claim it again. For example, if a person used R300 000 of the R500 000 with the first lump sum, the balance left is R200 000 and once this is used up this relief is not available again. For more details on how it works, read our Budget Tax Guide.

Does this mean you don't pay tax up to R500k in a lifetime? so in other words i either take the hit now or later in life, but either way taking the money now does not make things "worse" later in life?
ie, lets say you don't pay only for the first withdrawal, that would mean doing it now is actually quite bad since early in life your fund is still small.

I'd transfer the funds to a preservation fund from the info I can gather. Withdrawing retirement funds early is usually always a bad idea. Go with a low cost provider like 10x, Sygnia, Nedgroup (core series). Give them a call and they should be able to help you in terms of what's required from you

Thanks i'll look into those.

 

[bchip]

Just looking for advice on what is the better choice, i know things are different for each individual however sometimes the "correct" choice is so simple/obvious that it should be mentioned.
I Don't need the money at all. just want to make the better choice for it.

Don't mind taking teh tax knock now as long as it doesn't make things worse later on in life in terms of extra tax. ie, if i'm understanding the below correctly you get 500k tax relief in a lifetime, so whether i take the money now or later i'm the same off cause its still 500k.

Im hesitant to do too many calcs here, the best is to see a CPA who specializes in these things.
As jman suggested funds like 10x are quite low in fees and have the right people.

Basically though the choice you have (ignoring the lifetime exemption for a moment) is
- take the money now -minus taxes +returns somewhere else will be better than
- returns by a professional -minus their fees.

This can work out better in certain situations, but the rule of thumb for most
(because they dont have the time or experience in watching investments) is rather
to keep it invested with the professionals.
Think in your case the problem was more to do with which fund you were invested in.

Hope that helps.

 

[Zuner]

Basically though the choice you have (ignoring the lifetime exemption for a moment) is
- take the money now -minus taxes +returns somewhere else will be better than
- returns by a professional -minus their fees.

So i confirmed that withdrawing is done tax free up to 500k per lifetime.
i also contacted 10x where i learned that a preservation fund gains around 6% pa and has fees of 0.9% excl vat. and has 1 withdrawal(full or partial) in a lifetime.

So here's my thought, as in the bold above take the money -tax (which will be zero and eat into my 500k)
put the money together with my current saving which returns 7% and has no additional fees or over some years max out tax free savings.

Does this sound right? i get better interest (1% extra pa), and don't really effect my retirement negatively. 500k seems very low of a benefit that i should be worrying about losing some of it, as long as i don't misuse the money and invest it instead of spending (Which i can easily do, i don't have issues saving money.)

I don't know, it just seems to easy... i get more interest and pay zero fees doing it that way, but you know the saying, sounds too good to be true.7
Any input? FYI i understand why people don't like commenting on financial advice i do fully understand that any repercussions are my own and nobody else's.

 

[KleinBoontjie]

So i confirmed that withdrawing is done tax free up to 500k per lifetime.
i also contacted 10x where i learned that a preservation fund gains around 6% pa and has fees of 0.9% excl vat. and has 1 withdrawal(full or partial) in a lifetime.

So here's my thought, as in the bold above take the money -tax (which will be zero and eat into my 500k)
put the money together with my current saving which returns 7% and has no additional fees or over some years max out tax free savings.

Does this sound right? i get better interest (1% extra pa), and don't really effect my retirement negatively. 500k seems very low of a benefit that i should be worrying about losing some of it, as long as i don't misuse the money and invest it instead of spending (Which i can easily do, i don't have issues saving money.)

I don't know, it just seems to easy... i get more interest and pay zero fees doing it that way, but you know the saying, sounds too good to be true.7
Any input? FYI i understand why people don't like commenting on financial advice i do fully understand that any repercussions are my own and nobody else's.

Strange, I withdrew funds, way less than 500k (was just under 300k) and the tax man took his share......well, I got ****ed really bad. I don't know much, but I would get an second opinion on that info.

 

[Zuner]

Strange, I withdrew funds, way less than 500k (was just under 300k) and the tax man took his share......well, I got ****ed really bad. I don't know much, but I would get an second opinion on that info.

Check the below, i got it confirmed by my parents tax guy. and also further confirmed over the last few years when ex colleagues left i asked them if they got out the exact amount in cash that the statement from liberty says and they said yes, meaning it was not further taxed.

This might also be relevant

http://www.sars.gov.za/Tax-Rates/Income-Tax/Pages/Retirement-Lump-Sum-Benefits.aspx


RETIREMENT LUMP SUM BENEFITS
Tax relief on retirement lump sum benefits is allocated once in a lifetime in other words if it’s used up you can’t claim it again. For example, if a person used R300 000 of the R500 000 with the first lump sum, the balance left is R200 000 and once this is used up this relief is not available again. For more details on how it works, read our Budget Tax Guide.

 

[bchip]

So here's my thought, as in the bold above take the money -tax (which will be zero and eat into my 500k)
put the money together with my current saving which returns 7% and has no additional fees or over some years max out tax free savings.

Hi. Yes you are missing parts to the equation.

Depends what you invest in. You mentioned 2 things here and maybe confusing them.

Something that is interest bearing - like a bank account / fixed deposit -
still has taxes (the first R23,800 tax on interest is exempt) but interest received is still
taxed at the same rate as your salary.
[Side note: That means as an approx (hope I got this right) is that if you earn interest @ 8%
then an account up to ~R 660,0000 should still be interest free every year
Hopefully somebody else can check that but its R 660,000 * 8% * 45% = R 23,800]

If you are using the TFSA (tax free savings account) you have a limit of investing R 33,000 per YEAR
in that investment and R 500,000 in a lifetime.
So to transfer your new funds (eg) R 180,000 to a TFSA will take approx 6 years to do so.

Just remember that everything really has tax (literally except the TFSA).
You are either paying on the interest with revenue or on the dividends with DWT (20% in SA).

 

[bchip]

Strange, I withdrew funds, way less than 500k (was just under 300k) and the tax man took his share......well, I got ****ed really bad. I don't know much, but I would get an second opinion on that info.

You would probably have tried to correct this when submitting your tax return,
not through the pension fund. If its recent then you could maybe try and do a correction on your taxes.

Chances are then you still have the lifetime limit available.

 

[PsYTraNc3]

I believe the withdrawal is only tax-free on retirement and retrenchment (maybe some other special reasons)
Not resignation.

You would have to apply for a tax directive to get the withdrawal tax free and it will be declined

 

[supersunbird]

I believe the withdrawal is only tax-free on retirement and retrenchment (maybe some other special reasons)
Not resignation.

You would have to apply for a tax directive to get the withdrawal tax free and it will be declined

This!

 

[KleinBoontjie]

You would probably have tried to correct this when submitting your tax return,
not through the pension fund. If its recent then you could maybe try and do a correction on your taxes.

Chances are then you still have the lifetime limit available.

10 years ago, so I think a tad to late for that now.
I resigned and took everything out. Biggest mistake of my life, lost lots of money. Not to think of the interest I could've accrued. Hope someone will learn out of my mistake.

 

[Zuner]

Hi. Yes you are missing parts to the equation.

Depends what you invest in. You mentioned 2 things here and maybe confusing them.

Something that is interest bearing - like a bank account / fixed deposit -
still has taxes (the first R23,800 tax on interest is exempt) but interest received is still
taxed at the same rate as your salary.
[Side note: That means as an approx (hope I got this right) is that if you earn interest @ 8%
then an account up to ~R 660,0000 should still be interest free every year
Hopefully somebody else can check that but its R 660,000 * 8% * 45% = R 23,800]

If you are using the TFSA (tax free savings account) you have a limit of investing R 33,000 per YEAR
in that investment and R 500,000 in a lifetime.
So to transfer your new funds (eg) R 180,000 to a TFSA will take approx 6 years to do so.

Just remember that everything really has tax (literally except the TFSA).
You are either paying on the interest with revenue or on the dividends with DWT (20% in SA).

Makes Sense although i still feel i already took into account those points in my reasoning.
I struggle to see the benefit of using a preservation fund since from what i'm seeing the money still gets taxed as salary (minus the first 500k) at retirement. or am i wrong and that only gets taxed like a salary when taking it now and not at retirement?
Is that what i'm missing?

I believe the withdrawal is only tax-free on retirement and retrenchment (maybe some other special reasons)
Not resignation.

You would have to apply for a tax directive to get the withdrawal tax free and it will be declined

This!

So what you are saying is that 500k tax free is only at retirement and i'll get taxed for withdrawing now?
if that's the case i still don't see why i should keep the money in a preservation fund, cause either way it gets taxed now or later since later i'll have more than 500k thus i'll get taxed for that portion which will be the bulk of my retirement fund.

Just to be clear its only 130k, i'm still young.

 

[Zuner]

10 years ago, so I think a tad to late for that now.
I resigned and took everything out. Biggest mistake of my life, lost lots of money. Not to think of the interest I could've accrued. Hope someone will learn out of my mistake.

I have no plan on spending the money, i will be reinvesting, but i struggle to see the benefit of a preservation fund, from what i can gather on 10x the interest is around 6% and there are fees.
but FNB fixed deposit for example gives 7.3% and no fees.

both get taxed at retirement minus the 500k tax free so what am i missing.

 

[KleinBoontjie]

I have no plan on spending the money, i will be reinvesting, but i struggle to see the benefit of a preservation fund, from what i can gather on 10x the interest is around 6% and there are fees.
but FNB fixed deposit for example gives 7.3% and no fees.

both get taxed at retirement minus the 500k tax free so what am i missing.

Ok, so you got your mind set. Just let us know if the tax man took advantage, when you decide to action your plan. Would be helpful for future people going through the same.

 

[PsYTraNc3]

So what you are saying is that 500k tax free is only at retirement and i'll get taxed for withdrawing now?
if that's the case i still don't see why i should keep the money in a preservation fund, cause either way it gets taxed now or later since later i'll have more than 500k thus i'll get taxed for that portion which will be the bulk of my retirement fund.

Just to be clear its only 130k, i'm still young.

I have no plan on spending the money, i will be reinvesting, but i struggle to see the benefit of a preservation fund, from what i can gather on 10x the interest is around 6% and there are fees.
but FNB fixed deposit for example gives 7.3% and no fees.

both get taxed at retirement minus the 500k tax free so what am i missing.

If you withdraw, you get taxed.
If you transfer to another fund, you don't.

To avoid losing a lot of money that could have generated interest until you retire, why not just look for another fund with a better interest rate and transfer?

Might be best to get a broker involved to help with that.

 

[Zuner]

Ok, so you got your mind set. Just let us know if the tax man took advantage, when you decide to action your plan. Would be helpful for future people going through the same.

I wouldn't say my mind is set, but running the numbers i can't see the benefit of a preservation fund, but since its recommended by most there must be a bit of info i'm missing out on.

So if i take the money now minus tax and invest at 7.3% i get 1.41m in 35 years.
If i preserve it all at 6% i get 1.05m never-mind the fees they will charge.

getting that money at retirement both will be taxed minus the 500k (although the fixed deposit will be taxed annually when i submit my sars efiling.
the 500k Also means nothing in this instance cause i will have other policies going over 500k
There must be something i'm missing.

 

[Zuner]

If you withdraw, you get taxed.
If you transfer to another fund, you don't.

To avoid losing a lot of money that could have generated interest until you retire, why not just look for another fund with a better interest rate and transfer?

Might be best to get a broker involved to help with that.

Thanks i do understand that however please see the above post. with screenshot calculations.