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A Fin24 reader cashed a third of his retirement fund and left R1.5 million in his preservation fund. He wants to know if he can make a partial withdrawal and how it will affect the status of his savings. He writes:
At 49 years of age, I resigned from work and my retirement fund was declared paid up at R100 000. What does this mean in reality? On resignation, at 49 years, I cashed one third and left R1 500 000 in the preservation fund until I am 55 years old. Can I make a partial withdrawal from the preservation fund? What happens with the paid-up R100 000 and what could be the status of my savings at 55 years?
Mariska Comins, Head of Technical Support at PSG Wealth responds:
We will start with the first question related to the paid-up retirement fund of R100 000.
In terms of Regulation 38, which forms part of the Final Retirement Fund Default Regulations, pension and provident funds must preserve a member’s accumulated retirement benefits in the retirement fund on termination of employment, or until the fund member elects to withdraw their fund benefit in cash or to have it transferred tax-free to another retirement fund.In essence, a "paid-up member" refers to a retirement fund member who has left the service of their employer but has, nonetheless, chosen to leave their accumulated benefits in the fund will issue the member with a paid-up certificate.
Although such paid-up member no longer pays contributions to the fund, the member continues their membership, and their member-share will remain invested in the portfolio of choice. The ultimate benefit, payable to a member, is a combination of fund contributions and fund investment performance net of fees and costs.
If a paid-up member reaches the age of 55 years, the member may retire from the fund or choose to defer their retirement to a later date.
Now for the second question: On resignation, at 49 years, I cashed one third and left R1 500 000 in the preservation fund till am 55 years. Can I make a partial withdrawal from the preservation fund?'
It is not quite clear whether one third was withdrawn at the time of resignation from the retirement benefit before the transfer to the presentation fund, or after the transfer to the preservation fund was completed.
In the case of a pension or provident fund, you can either:
* Withdraw the full fund value (subject to the retirement fund lump sum withdrawal tax table) in cash upon resignation, or
* The full amount could be transferred tax-free to another employer fund, retirement annuity, or preservation fund, or
* Withdraw a portion of the member’s benefit and transfer the balance to another approved fund eg preservation fund.
If a member has transferred their retirement benefit from a pension fund to a pension preservation fund or a provident fund to a provident preservation fund, such as in the case of resignation, one withdrawal is allowed. This is subject to the retirement fund lump sum withdrawal tax table and is allowed from the pension preservation fund or provident preservation fund before retirement.
A deduction from a member’s benefit in a retirement fund before the balance is transferred to a preservation fund is not a payment to the member during their membership of the preservation fund and is not regarded as the member’s one withdrawal.
A member who transferred their retirement benefit to a preservation fund upon, or after, reaching normal retirement age in terms of the rules of the fund, will not be allowed to take a withdrawal benefit from the preservation fund, except where the member emigrates.
No recurring contributions can be made to a preservation fund.
A member of a preservation fund can retire at the age of 55 or younger, should the member become permanently ill. There is no maximum age of retirement from a preservation fund. In a pension preservation fund at retirement, only one-third of the retirement benefit may be paid as a lump sum (except where two-thirds of the total value does not exceed R165 000).
As of 1 March 2021, members of provident funds will only be allowed to take a maximum of one-third of their benefit at retirement as a cash lump sum. The balance of the benefit must be used to purchase a post-retirement income product (be it a living, life or a combination of a living annuity and life annuity) to provide an income to the member (excluding their vested rights) similar to pension funds and retirement annuity funds.
To conclude, members must seek advice before any benefit is paid to them or any transfer is made on their behalf to another retirement fund as tax must be calculated on the aggregate of all retirement fund lump sum benefits taken previously (Be it on withdrawal and/or retirement, death, and including severance benefit). It is therefore important to realise that taking withdrawal prior to retirement will have an impact on the taxation of lump sums taken at retirement.
Questions may be edited for brevity and clarity.
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