Your family is maturing, and your focus is now on preserving and growing your wealth. For many individuals, their careers are peaking and the energy and many hours that they have devoted to their careers, is rewarded with success in terms of position, and probably the highest level of income during their productive lives. Your focus at this stage should therefore be to firstly preserve your capital, but also to grow it in a properly diversified portfolio, across asset classes, and with the best of breed asset managers that actively manage your portfolio on a daily basis.
A maturing family often implies adult dependants with very expensive needs, for example tertiary education and their own membership of a medical aid. Many clients may also during this phase sell their companies, or receive “golden handshakes”, well before their normal retirement age. As a result they may consider new job opportunities, or even decide to start a new business. They may even consider accessing their retirement savings, in order to fund their new business. One of the major risks that need to be addressed at such a juncture is the opportunity cost of withdrawals from your current retirement savings, and the likelihood that you may lose that capital in the event that your new business fails.
When making a withdrawal from your retirement savings, the first significant consequence is that this will invariably result in a tax liability. A withdrawal is considered a distribution from the plan. This means that the necessary taxes need to be paid on the amount distributed. At the moment the following table will apply:
|Taxable portion of withdrawal Rates of tax|
R0 – R22 500
R22 501 – R600 000
18% of the amount over R22 500
R600 001 – R900 000
R103 950 plus 27% of the amount over R600 000
Over R900 000
R184 950 plus 36% of the amount over R900 000
It is important to note that you are only allowed one withdrawal from your retirement funds before the age of 55.
One of the biggest consequences of making a once-off withdrawal is rarely considered by clients: the lost opportunity of compounding interest earned over time. If the time value of money (the idea that a Rand today is worth more than a Rand in the future because of its potential earning power) is not applied, you could be missing out on thousands of Rand at retirement.
The financial consequences for taking a withdrawal from your retirement savings greatly affect your ability to meet retirement saving goals. The alarming fact is that many clients make once-off withdrawals every time they change employers. When multiple withdrawals are taken, the negative effects compound, creating bigger obstacles for you to overcome before you reach retirement.
Pentagon Financial Solutions PTA (Pty) Ltd can provide a client with advice and the appropriate product solutions, inclusive of a preservation fund to protect your accumulated wealth, and assisting in investing in a savings plan within a diversified portfolio, to provide for your maturing family.