When resigning from Old Mutual, 2 highly qualified friends, one an actuary with 15 years experience and the other an accountant with 30 years experience, suggested I preserve my retirement fund, wait until my average rate of taxation is lower (you earn less spending time writing articles like this!) and then withdraw at a lower rate of taxation - this of course is well dated advice, as taxation on withdrawl DOES NOT work like this anymore.
Legislation at the time this article was written (caveat, these bands are known to change regularly) has rates of taxation varying by the size of the withdrawal, and have nothing to do with the average rate of income tax you're paying:
| Tax Rate | Withdrawal lump sum | Retirement lump sum |
|---|---|---|
0% |
R 0 - R 22,500 |
R 0 - R 315,000 |
18% |
R 22,500 - R 600,000 |
R 315,001 - R 630,000 |
27% |
R 600,000 - R 900,000 |
R 630,001 - R 945,000 |
36% |
R 900,000 + |
R 945,001 + |
Source: SARS (effective March 01, 2011)
This translates into the following effective rates of taxation:
| Withdrawal | Retirement lump sum | |
|---|---|---|
R22,500 |
0% |
0% |
R600,000 |
17.3% |
8.6% |
R900,000 |
20.6% |
14.4% |
R2,000,000 |
29% |
26.1% |
At first instance it might seem a no-brainer to at least withdraw R22,500, as the tax treatment is the same at retirement as at early withdrawal, but you are only allowed one withdrawal, so if this makes up a miniscule percentage of your savings it might not make sense to make this withdrawal and lose your option to make further withdrawals in the future (you never know what might happen).
Assuming it is not needed to fund pre-retirement cashflow needs, a withdrawal of R900,000 would only make sense if you believe that you could gain a 6.2% higher net return than if it were in your chosen preservation fund.