It’s been a pretty rough week for Samuel!
On Monday morning he was called into the boss’s office. Strange, Samuel thought to himself, he never calls me in, ever!
Samuel didn’t know it yet but life was about to throw him a curve ball. He was about to be put out to pasture.
Nervously, Sam knocked on the door…
Hi Sam, come in. Take a seat.
Yes, Dan, you wanted to see me. What’s up?
Sam, you know how the business has been struggling for the past 5 years? Well, we’ve looked at every angle to keep our head above water, but we’ve got no option but to downsize. Some of the guys are going to be offered retrenchment packages, but in your case, we’d prefer you take early retirement.
But Dan, you said to me that I could stay on till at least 60?
I know, I know I did Sam, but that was two years ago. Things have changed. How were we supposed to know that things would come to this? If we don’t shed jobs, we’ll go under, plain and simple. And besides, you’re one of the highest paid guys in the shop nowadays.
A half hour later and it was all over.
20 years of his life’s work wiped off the board in one 30 minute meeting. How am I going to break this to Naledi? Never mind that, what am I going to do?
Truth be told, Samuel’s got two options, neither of them good, in an economy that’s taken a downturn.
Option one – Sam can resign
Sam is bitter and it’s quite easy to ask for everything in cash, but doing that would mean paying a ton of tax. At resignation, Sam can cash in all the money in his pension fund and pay the tax, but only the first R25 000 of his pension proceeds would pay out tax-free. The good news is that any amounts invested into either of the two products mentioned below happens tax – free.
- Retirement Annuity or
- Pension Preservation Fund
With the Retirement Annuity:
No withdrawal is allowed before Sam reaches the age of 55. Fortunately, he is already there and at this point he can take one third in cash after paying any tax. The balance must be used to buy an annuity income which you might know as a ‘pension’. There are exceptions to this rule depending on whether his Retirement Annuity is less than R247 500, but this is usually how it works.
Sam can also make monthly contributions towards his RA and add further lump sums if he wishes to.
With the Pension Preservation Fund:
Sam is allowed a once-off withdrawal prior to retirement. In other words, Sam can take money out when he resigns, and once more before retiring. Both times he’ll be taxed as if he has resigned, of course.
Sam won’t be allowed to add other lump sums of money or make monthly contributions towards his preservation fund.
Option two – Sam can retire
The big positive here is that Sam will get a large tax deduction on the amount he withdraws in cash.
Remember that Sam is on a pension fund. This means that at retirement he can take one-third in cash while the remaining two-thirds must be used to buy an annuity income (a pension).
Of the one-third taken in cash, the first R500 000 thereof is paid out tax-free but only if he has never used the R500 000 deduction previously. The R25 000 resignation withdrawal deduction is included in this sum as well.
The problem that Sam faces is that he hasn’t saved enough to be able to retire at 55. His plan meant working till at least 60, but preferably to 65. Imagine retiring at 55 and living till 95? That’s 40 years in retirement versus his 30 year career.
So what did Sam decide to do?
He couldn’t retire at 55 and start eating into his pension fund. That was out. He needed to save a lot more.
He also didn’t have the option of a voluntary retrenchment package since he was already at the minimum retirement age of the company. So instead of getting a retrenchment package based on 30 years of service and his pension benefits, it was cheaper for them to simply ‘force’ him to retire.
Sam chose to resign instead and invest his pension fund into a pension preservation fund. He hoped to find alternative employment for the next 5 to 10 years.
Don’t be like Sam – who assumed he’d always have a job – that he was irreplaceable. Rather focus on upskilling yourself and making yourself employable well into your ‘older years’.
Ask yourself a few questions:
- Could I continue in this occupation after I’ve retired?
- If I hate my job, then what kind of work would I prefer doing?
- What skills will I need to learn in order to do this new job?
- Would I be able to do this after retirement or is it too strenuous?
Think of yourself as a product which needs to be marketed. Why would someone want to buy your product?
And finally, save as much as you possibly can while you still can. Spend less money on eating out and rather invest it towards retirement. Drive that car a year or two longer than planned and save the difference.
Most of all, find out where you stand right now by having a financial plan drawn up, even if it means paying for it.
Our business is life, disability, critical illlness, income protection and funeral cover. Can we help you with anything?
Until next time.
The Wise About Life Team