Can I withdraw the full amount of my pension after early retirement?

The long answer

What the Sanlam website says is that you can only cash out your pension fund if you withdraw from the pension fund when you either resign or lose your job. But if you retire, you can only cash out up to one-third of the money in your pension fund and the remaining two-thirds balance must be used to buy an annuity, which is a fixed sum of money paid out to you each month. So that is what seems to be the case with your pension fund.

If you resign or lose your job, you could cash out the full amount, but the tax on the cash lump sum would be more than if you retired from the fund. This is the tax that would apply if you cashed out your pension fund: 

• The first R25,000 is not taxed.

• The balance up to R660,000 is taxed at 18% of the amount over R25,000.

Since the COVID pandemic, many people have resigned from their jobs so they could access their pension funds. The government wants everyone to save for their old age so that they aren’t dependent on government grants, but they know that the reason that people resign and cash in their pensions is that they are struggling. So, the National Treasury and SARS have made new proposals: the 2023 Draft Revenue Administration and Pension Laws Amendment Bill. 

These bills allow some cash withdrawals to be made from pension funds so that people don’t have to resign to access their pension funds. The bills are supposed to come into effect from 1 March 2024. 

After 1 March 2024, pension funds will have to create a "three-pot system", which has a "savings" component or pot, a "retirement" component and a "vested" component.The BDO website explains the three pots or components as follows:

Savings Pot:

One third of a member’s pension contribution will be put into the "savings" pot, and members will be able to withdraw amounts from the savings component without having to resign from their jobs. These are the conditions that BDO sets out:

• You can access this pot once per tax year (1 March to 28/29 February of succeeding year).

• Minimum amount = R2,000.

• Maximum amount = full amount in the pot.

• On withdrawal, punitive tax rates will apply (i.e. this withdrawal will be heavily taxed)

• At retirement, the pot can be paid out to you as a cash lump sum; however, any prior withdrawal from this pot will reduce your cash balance.

• Alternatively, at retirement, you can transfer all or part of this pot to your retirement pot.

• At death, your beneficiary can choose to take the amount in this pot as a cash lump sum or to transfer such amount to the retirement pot in order to purchase an annuity.

Vested Pot:

A member’s existing retirement interest as at 1 March 2024 will go into this pot. To allow members to withdraw money from the savings pot, National Treasury came up with the idea of "seed capital", which is the starting balance in the savings component. This seed capital will be calculated as 10% of the value of the member’s "vested" component but is limited to R25,000. On 1 March 2024, you can access this seed capital from your savings pot, up to R25,000.

Retirement Pot:

From 1 March 2024, two-thirds of your monthly pension contribution will go to this pot. It will be compulsory for this pot to be preserved until your retirement. You will not be allowed to withdraw any money from it even if you resign from your job. BDO sets out the following rules that will apply:  

• At retirement, preferential tax rates apply, e.g. currently the first R550,000 is tax-free and thereafter the less punitive lump sum table rates apply.

• You are obliged to buy an annuity (including a living annuity) with the full amount in this pot.

• If your retirement interest is less than R165,000 you will be allowed to take the amount as a cash lump sum. This is the current minimum amount and may change.

Wishing you the best,
Athalie