Can I make a withdrawal from my preservation fund before retirement?

Please note: As of 1 September 2024, the rules for withdrawals have changed with the implementation of the two-pot retirement system. Read more about the two-pot retirement system changes here.

Question

I am 56 years old, still working, in financial trouble and have a paid-up retirement annuity that has R185 000 in the fund, and a provident preservation fund that has R43 000. If I withdraw the full amount from the provident preservation, will I pay no tax? The term of the preservation is 2018. Also, what is the best thing to do - should I retire from the retirement annuity and invest the tax-free lump sum, or should I leave it until the retirement age of 60? Confused.

Answer

You are allowed a full or partial withdrawal from your preservation fund before retirement. The earliest retirement date is usually 55, although this is subject to the fund rules. These issues are important because they determine if you can a) make another withdrawal and b) the tax thereon.

Scenario 1: You have not previously withdrawn from the preservation fund,

- you can then make one full or partial withdrawal before your minimum retirement age. If that is age 60 rather than 55, you will be taxed per the withdrawal lump sum tax table, which means the first R22 500 is not taxed, the balance is taxed at 18%. (If you have previously withdrawn from another retirement fund, this would be deducted from your cash-free portion.) 

If you can retire at age 55, then you are taxed per the retirement lump sum tax table, which means the first R315 000 of any cash lump sum is paid out tax-free (net of previous lump sums paid out to you).

Scenario 2: You have previously withdrawn from the preservation fund

- you can then only access the balance at the minimum retirement age (either 55 or 60). At that point, you would be taxed per the retirement lump sum tax table which means the first R315 000 of any cash lump sum is paid out tax-free (net of previous lump sums paid out to you).

As to the second part of your question, your retirement annuity is presently invested, so we see little point in retiring from the retirement annuity to re-invest the money again unless you require the annuity income now (you have to buy an annuity with at least two-thirds of your retirement annuity proceeds).

Note that you receive tax-free lumps only once (i.e. the R315 000 covers all your funds, you do not receive this for each fund).