GEPF Retirement Planning

Cash Out vs Pension Preservation – 

GEPF members need to think carefully

When resigning from government service many employees are faced with a stark choice. Is it better to request a full cash withdrawal or to transfer the GEPF Actuarial balance to an approved pension preservation fund?

The answer is of course as usual, it depends…. However, one aspect can be guaranteed. If you select the cash withdrawal option you will very likely encounter a hefty lump sum taxation bill. Further, if the cash out is before age 55, the tax on the lump sum will be used to accumulate to future retirement lump sum withdrawals. In effect you could experience a double tax blow. Not only will you be paying tax on your lump sum at pre-retirement rates, but this lump sum would impact on any future retirement taxation due.

Not sure what this means? Let’s look at a practical example:

John is 50 years old and the GEPF calculates his lump sum as R2 000 000.

Option A – full cash withdrawal

By electing to take the full cash withdrawal before early retirement, John will be taxed on the full lump sum at pre-retirement rates. This is calculated on a sliding scale. Thus he will end up paying tax of R567 000! In other words, 28.35% of John’s retirement benefit will be paid to the South African Revenue Services (Sars).

Option B – Transfer to a Preservation Pension Fund

A preservation pension fund does exactly what its name suggests. It preserves your pension benefit until at earliest age 55 in a tax free environment. If he uses a Glacier (Sanlam) Preservation Fund, the rules will allow him a 1/3 withdrawal immediately. He would receive R550 567 after tax of R116 100. The balance of R1 333 333 will be invested. If we assume a moderate growth of 7% per annum, this fund will grow to R1 870 072 by age 55. The fund rules allow a further 1/3 withdrawal, but this time we get retirement tax rates. He would receive R601 153 after paying only R22 205 tax.

So where is John now?

He received R1 151 420cash in hand and paid R138 305 tax. He only paid 6.9% of his original lump sum to tax (against 28.35%) and he is left with a further R1 246 715 to invest in a life or living annuity to provide a pension. Not a bad outcome for John!

In fact if John was employed before 1998, the likelihood is that he would have paid little or no tax at all! But that is an article for another day.

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