Question:
I’m 30 years old and leaving my current job after four years. I earn around R200 000 a year. My pension payout will probably be around R100 000, but I’m worried about the tax implications of taking the cash.

Will it be a serious issue for someone who isn't too old? If you can’t help, where can I go for help on issues of this kind?

Answer:
Gone are the days when people stayed with one company for their entire working lives. Today, the likelihood of staying with one employer is slim and this means that every time we change jobs we are faced with the question of what to do with our accumulated pension or provident fund benefit.

Firstly, from a purely technical point of view, you have a number of options that the fund will communicate to you. You can choose to:

• transfer your benefit to your new employer’s pension fund (tax-free)

• transfer your benefit to a preservation pension fund (tax-free)

• transfer your benefit to a retirement annuity (tax-free)

• take the cash (taxable)

I seems as though you are considering taking the cash. Currently, you are likely to receive only R1800 tax-free with the balance subject to taxation at your average rate of tax. This is generally slightly lower than the marginal rate at which your income is taxed.

New legislation, which became law last week, has introduced a new system of taxing withdrawal benefits and the new regime will be effective from 1 March 2009. In summary, the tax-free portion has been increased to R22 500 with a sliding scale applicable to the taxable portion.

Secondly, a whole set of additional considerations are equally relevant:

Consider why you may wish to take the cash benefit. Do you have large amounts of debt with high interest rates? Or are you tempted by the availability of the cash for potential nice-to-have rather than need-to-have expenses?

Remember that the savings were made to fund your retirement and making unnecessary withdrawals from your retirement savings is likely to destroy significant value. To use a simple example, if you keep your R100 000 invested for the next 30 years and earn an investment return of 10 percent you will have almost R1.8-million available at retirement.

I certainly would not recommend taking the cash without first consulting a Certified Financial Planner who will develop a financial plan that takes your personal goals and needs from now until retirement as well as in retirement into account. Of course, one does not only have needs after retirement — it is essential also to look at the lifestyle needs you have now. You may wish to travel, purchase a specific car, buy a house, etc. A professional planner will take into account all such needs and goals and build a financial plan with you and attempt to find financial strategies that will enable you to live the life you want. The decision as to how best to deal with your pension fund withdrawal benefit is but one relevant issue.

It is vital that you understand that every decision you make has a financial consequence. A financial planner will be able to show you the consequence of making one or the other decision now. In this way, if you decide to take your benefit in cash, you will understand the effect on your financial plan and your ability to meet your lifestyle goals. She or he will also help you understand the effect of preserving your savings. You will then need to decide whether you are prepared to forgo some benefits at retirement.

Many of the decisions relating to options available from retirement funds are irrevocable. Rather than regretting a choice a few years down the line, be proactive now. Consider all possible options and weigh up the financial consequences of each. Yes, you are correct, certainly taxation is always an important consideration, but it is never the only consideration.

Understand your options and understand their consequences.

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