Don’t let the opportunity to access retirement benefits earlier distract you from your long-term savings goals


The government recently announced that it could allow members of pension funds to make limited withdrawals before retirement from their pension funds. While the intention is to provide members with short-term financial relief in very specific circumstances, it is important not to lose sight of the long-term nature of these investments and the generous tax benefits given for investing in those investments. -this.

An investment in a pension fund is a long-term commitment. It allows you to amass a large amount of money throughout your working life, providing a nest egg that you should ideally only access when you need it most – in retirement.

The tax authorities recognize the importance of retirement savings and offer tax breaks to savers to do so. Retirement funds are arguably one of the most tax-efficient ways to build and manage your long-term savings.

The tax authorities encourage you to save in three basic ways:

First, the contributions you make to your retirement fund are tax deductible, within certain limits each year. This means you pay less tax on your monthly income while saving for your retirement.

Second, the money you accumulate in your retirement fund will grow tax-sheltered over time. This means that the growth of your retirement savings, while it is in your retirement fund, will be exempt from income tax, capital gains tax and dividend tax.

And finally, when you retire, a portion of your retirement benefits may be tax exempt. Benefits taken as a lump sum cash at retirement will be subject to the lump sum tax tables, where the first 500,000 Rand of the lump sum cash is tax exempt and the remainder of the lump sum cash will be taxed at preferential rates. Any annuity you receive will be taxed at your marginal tax rate.

With all the savings that pension fund members accumulate, it is no wonder that many people, including government lawmakers, are talking about the possibility of allowing members to tap into these savings to help them fight financial problems that may exist in the present. As these savings turn into substantial sums over time, it’s easy to imagine that they could help us in the present.

According to a recent statement from the National Treasury, the government plans to allow members of pension funds limited access to their retirement benefits before retirement, but only in emergencies or extraordinary circumstances. It is proposed that members accumulate two pots of money in their retirement funds – a pot for long-term savings and a second pot allowing members to access short-term financial relief. A member who accesses his or her short-term fund prior to retirement may, however, be forced to retain a portion of their benefit balance until retirement, even if that member quits their employment. The design and details of these proposals have yet to be defined and it is likely that we will not see these changes take effect until next year, at the earliest.

While early access to your retirement benefits may solve your immediate financial needs, you should avoid the temptation to dip into your larger savings pool. Early Access undermines the ultimate goal of long-term savings, which is to take advantage of tax breaks and the time value of money to grow your investment into your retirement years.

The fact that this savings grows over time and that this growth is tax-exempt should make you think twice before questioning your savings goals.

So, before these announcements go into effect, take a moment to consider the significant tax breaks you’re getting on your retirement savings, the importance of your long-term goals, and the serious impact that Early Access can have. have on your retirement. James Coutinho is Senior Tax Manager at Liberty Group


This article does not constitute tax, legal, financial, regulatory, accounting, technical or other advice. The material was created for informational purposes only and contains no personal recommendations. While every care has been taken in the preparation of this document, no member of Liberty makes any representations, warranties or commitments and accepts no responsibility for the accuracy or completeness of the information presented. Please consult your financial advisor if you require financial advice and / or intermediary services.

Liberty Group Limited is a Licensed Insurer and Licensed Financial Services Provider (# 2409).

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