Under the new “two-pot” system, the cash in retirement-fund “savings pots” presents a real temptation to fund members, but withdrawing it should be resisted for a few very good reasons.
An “instant gratification” mindset may kick in when you check the balances of the various “pots” in your retirement fund. It’s important to keep that mindset in check because surrendering to it will cost you in several ways.
You may think, ‘Oh, I’ve got R20 000 I can withdraw. Why don’t I use it to buy a new lounge suite or treat myself to a weekend at a luxury spa?’ However, if you were to choose to spend that money, the wise decision would be to leave it where it is.
First of all, you will not receive the full amount – a tax of between 18% and 45% will be deducted, depending on your income. When you apply to your fund for a withdrawal from your savings pot, which you can do only once a year, you must disclose your annual income. You are then taxed on the withdrawal at your marginal tax rate, depending on which bracket you fall.
For example, according to Sars' tables for the 2024/25 tax year, if your annual taxable income is R300 000, you will pay 26% of the withdrawal amount to the taxman. If your income is R600,000, you will pay 36%.
The second, more powerful, reason is that, if left in the fund, the money will continue to grow, adding substantially to your savings, owing to the magic of compound interest. You may think R20,000 isn’t a lot – it won’t make a difference to your savings in the end. But you underestimate the impact of compounding. Left to grow in your fund at 10% a year, for example, over a career of 30 years, that ‘measly’ R20 000 would boost your retirement savings by almost R400 000.
Now, imagine if you made withdrawals every year. You could strip millions from your retirement capital. A related reason for leaving the money where it is is that a retirement fund is the optimal place in which to build a nest egg.
If you took that money out of the fund and invested it somewhere else – apart from a tax-free savings account, which is also geared to long-term saving – you’ll pay tax on interest, subject to an annual exclusion of R23 800 if you’re under 65, you’ll pay capital gains tax on the gain in a property or share investment, and a tax of 20% will be levied on dividends. None of those taxes apply to retirement funds, and because they are institutional investors, funds typically pay lower investment fees than retail investors. With these reasons in mind, think again before you complete that withdrawal application. Don’t give in to temptation.
* Manyike is the head of financial education at Old Mutual.
PERSONAL FINANCE