The flood of newspaper articles before Christmas dealing with retrenchments at mines, vehicle dealerships, factories and retailers left a bitter taste in the mouth.Internationally it is tough times that require drastic decisions by companies in order to survive.That, however, does not make retrenchments and ‘forced’ early retirement less traumatic.It is for this reason that experts warn against undue haste and ill-considered decisions.It is probably easier said than done, but people should think with a clear and sober head if they do find themselves in a position where they could be retrenched or forced to retire.
Mientjie Botha, senior tax adviser at Alexander Forbes, sounds the first warning bell.Money taken out of a pension fund before retirement should be replaced.The calculation of pension money that is earmarked to replace income after retirement is based on somebody working until the age of 65.
The current economic crisis, however, forces people as a matter of necessity to consider a couple of options long before that age. One of the options to consider is an invitation by the company to consider early retirement.
Fiona Renton, head of Legal Services at Alexander Forbes, sounds the second alarm bell.People who do consider this early retirement option should clarify whether the rules of their pension fund allow for early retirement before the age of 55. "The rules of many funds consider the age for early retirement as 55 years. Anybody who wants his or her fund value to be paid out of the fund before that age, does not retire but merely withdraws from the fund.”
The tax implications are quite dramatic.The rules of a pension fund can be changed by the trustees; but in the case of a retirement annuity, the act needs to be changed.Anybody belonging to a retirement annuity fund may not, according to the act, withdraw from the fund before the age of 55.
Botha explains how drastic the tax implications are for somebody who retires before the retirement age from a pension fund: "Only the first R1 800 of the pension is currently tax free. If somebody retires at the normal retirement age or goes on early retirement (as determined by the fund rules) the first R300 000 is tax free.”
It is only in March this year that the meager R1800 will be increased to R22500.It is still a major leap from R22500 to R300000.Botha (previously from National Treasury) says the reason for the major difference is to encourage people to remain in their funds if they haven’t reached retirement age yet. Hugo van Zyl, tax consultant and business adviser from Pretoria, sounds the third warning bell."Do not convert your pension into cash.That way you have immediate exposure to SARS for any taxes in arrears and it also exposes you to all your other creditors.”
According to Van Zyl, all those creditors are forced to wait if the pension amount is placed directly into a preservation fund or a life annuity.Botha explains that provident funds allows for the payment of the total amount as a lump sum.If someone merely resigns and is no longer a member from his or her employer’s pension fund, only the first R22 500 (from 1 March 1) is tax free.
In the case of the employee accepting a retrenchment package, the first R30 000 of the package is tax free.The rest will be taxed at the marginal rate of the taxpayer.According to Van Zyl, certain criteria have to be satisfied for one to qualify for that tax-free portion.
The tax-free portion only applies if the company is involved in extensive retrenchments, the person who is retrenched is not a director or does not hold any shares.The irony is that in many cases companies want to get rid of their more expensive, senior people who are directors and, in most instances, own shares. It seems as if government is overly sensitive when people want to access their savings before retirement.
Not everybody retires from the fund to go on an exotic boat cruise or to buy a brand new car or even do some home renovations.At this stage, it is merely a case of survival for many people.People use some of the money to pay the bond to keep a roof over the family’s heads, the water and electricity bill or school fees.
People need money to start afresh. "That does not mean that every second South African should take their pension and start a ‘pie shop,’” says Van Zyl.The reality is that they will not get a loan to become self-employed and in many instances their pension money is their only hope. Former US President George W. Bush introduced the Worker, Pensioner and Worker Recovery Act of 2008.It allows for temporary relief to pension funds during the economic crisis.
In South Africa, there is little sign of any relief on any front. Government is alert to a possible knock in revenue from taxes due to the meltdown and taxpayers shouldn't rely on any relief from these quarters. Steps to be taken to assist people who have lost their jobs entail much more than mere favourable tax measures.If one looks at the ANC election charter and the numerous promises, there seems to be an awkward absence of incentives for people who want to look after themselves.
Retirement outside fund rules
R0 tot R22 500 Tax free
R22 500 to R600 000 18%
R600 000 to R900 000 27%
R900 000 + 36%
R0 to R300 000 Tax free
R300 000 to R600 000 18%
R600 000 to R900 000 27%
R900 000 + 36%
Source: Published in Sake24 (TaxTALK)