Estate Living Magazine Invest SA - Issue 41 May 2019 | страница 47

l i v e
Jumping between jobs
The younger you are, the more likely it is you’ll be changing
jobs often, and it’s not uncommon for a 20-something-year-old
to switch jobs 10 or more times in their career. And it’s not just
limited to changing companies – many will have a complete
change of career and essentially ‘reinvent’ themselves.
And, for most people, when faced with the option of a cash lump
sum now versus preserving your fund for the future, the here-and-
now usually wins. It’s hard to see the future benefit when you’ve
got urgent commitments and responsibilities in the present.
I’ve tried to keep the following example as simple as possible.
Lerato is 25 years old and contributes R5,000 a month towards
her retirement. We’ll assume a 5% increase in contribution every
year, and we’ll put in a small growth rate of 6% per annum on the
investment.
Year Investment Value
s m a r t
likely not suffer income tax at these sorts of effective rates in any
event. Another way to look at exiting at these lower tax levels is
that it could be a great way to access after-tax money that can be
invested for the long term, giving rise to capital gains, which are
taxed at much lower rates than an annuity.
Things change though, when you consider withdrawal amounts
in the millions, as the effective tax rate can jump as high as
33%. Again, this allows you to prevent being subject to paying
marginal rates on an annuity when you reach retirement on this
money, but it does mean crystalising a material tax burden now.
The benefits of tax-deferred investing for the long term should
then definitely be considered.
What’s the money for?
All these examples simply illustrate the tax implications of
withdrawing from a provident fund or provident preservation
Tax on full withdrawal Effective Rate Net Withdrawal Years to "catch up"
R 64,490.40 17% R 318,789.61 0.4
10 R 1,006,160.51 R 209,2017.78 21% R 796,942.73 1.1
15 R 1,981,482.50 R 560,333.70 28% R 1,421,148.80 1.9
20 R 3,469,534.59 R 1,096,032.45 32% R 2,373,502.14 3.2
5 R 383,280.01
25 5,696,838.23 R1,897,861.76 33% R 3,798,976.47 4.3
30 8,982,103.27 R 3,080,557.18 34% R 5,901,546.10 5.3
35 13,772,025.49 4,804,929.18 35% R 8,967,096.31 6.3
40 20,690,577.10
The truth of the matter is that one can never get away from
paying taxes, and whether you bite the bullet now to free up
your investments or wait until retirement, you’ll be paying tax
somewhere. Preserving your funds, either by transferring them
to your new employer’s provident fund or to a preservation fund,
will potentially reduce your overall tax liability. It also prevents you
from wasting it on tempting, but not financially astute lifestyle
choices. Exiting early (and often) with low effective tax rates
could be quite compelling if you consider that you might have
otherwise bought an annuity with this money and been subject
to marginal income tax rates on this money later in life. Then
again, chances are your income would be lower, and you might
If you’re planning on investing the full amount then you’re
probably headed in the right direction. If, however, the money
is simply to pay off debt, improve your lifestyle, go on holiday or
renovate the home, then you should really consider the future
impact.
Conclusion
If you’re going to withdraw cash from your provident fund when
you leave your job, it stings less if the balance of that account
isn’t too large. The bigger the balance gets, the more tax you’ll
pay. If you think there’s a better investment opportunity for the
money (and it had better be pretty good), then seek sound
financial advice and put the money to work.
The effects of compounding growth are often forgotten but
the reality is that it is very challenging to ‘catch up’ on your
investments.
Brendan Dale
N
Tax implications and considerations
fund. They don’t deal with whether you should or shouldn’t be
withdrawing in the first place.
This table shows how tax on withdrawal erodes Lerato’s
investment, as she would either need to invest at a better
growth rate than she currently has (and possibly with reduced
fees) or she would need to invest for longer. This becomes far
more evident when making withdrawals often throughout your
career, but it’s unfortunately hard to depict as there are so many
variables and options.