Retire: Pre-retirement withdrawals

In Latest, Retire by Kristia van Heerden

You may have an opportunity to withdraw from your provident or pension fund due to changes in employment during the COVID-crisis. Access to funds might cover some of your short-term expenses, but the long-term impact on your net worth could be severe. In this article we’ll share some factors to consider when making this decision. 

The tax

When you withdraw from your pension fund before retirement, the tax is brutal. The tax rate will depend on the size of the withdrawal. The withdrawal tax rate works on a sliding scale depending on how much money you take out. It also affects how much tax you pay on lump-sum withdrawals upon retirement. 

Depending on how long you’ve worked, the amount of money you’ll get out might still be huge, even after paying tax on it. To avoid the temptation that comes with that amount of cash, don’t focus only on what you’ll get out. Pay close attention to how much of your savings will go to SARS.


Tip: We discussed pre-retirement withdrawals in this podcast.


Based on the table below, if you wanted to withdraw R1m from your fund, you would get R793,000 after tax. That’s a hefty sum, especially if you’re unsure about your income going forward. However, it means R207,000 of your savings would go to SARS.

You’ll still pay tax when you retire from the fund, but you’ll have more control over how much tax you pay. 

The opportunity cost

The tax is only the beginning of the cost. All growth and dividends within a Regulation 28-compliant product is tax free. When you withdraw from your pension fund, you give up:

  • The growth you would have received on the full amount had you remained invested.
  • The growth you would have received on the tax you paid.
  • The tax-free growth, dividends and interest you would have earned had you remained invested.

How to make the decision

If accessing these funds is the difference between survival and bankruptcy, there’s no choice. Pay the tax and get back on your feet. It’s never too late to start over. 

However, if accessing these funds is tempting because you want to buy a big-ticket item or move out of a Regulation 28-compliant environment, it would behoove you to run the numbers. One way to do that would be to look at past growth – either of your retirement fund, the fund you’d like to get into or even the entire market. These numbers are just to help you make a choice, so feel free to play around with the variables. 

Based on the performance of the fund or market over a period (you can choose however many years you want), how long would it take the money you have left over to get back to the pre-tax number? 

Let’s say the Satrix 40 is your benchmark for 10 years. How long would the money you have left over after tax have to be invested for you to get back to where you started?  If the Satrix 40 grew by 6.7% per year for the last ten years, how many years would it take for your R793,000 to turn back into R1m? 

Let’s say you get to four years. That’s four years before you can start growing your net worth again, if you reinvested that money. How long will it take you to get back to your million if you spend that money? What if the fund you move into returns less than 6.7% per year. How much longer will it take you to get back to where you started?

Under the current circumstances, it’s not as simple as saying you should never withdraw from your retirement fund. However, since this decision can impact your wealth for the rest of your life, it’s a decision worthy of long, serious thought. 


Saving for retirement is the biggest investment most of us will ever make. Sadly, it can also be very complicated. In this monthly blog, we try to answer some of the retirement questions we hear most often, ranging from which products are best suited to different circumstances to efficient tax treatments. Words by Carina Jooste.


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