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Different retirement funding vehicles and how they work

A look at the rules for withdrawals, early termination and transfer.

The retirement funding industry is highly regulated and often difficult to navigate. In this article, we take a closer look at the different types of retirement funds available to investors, and the applicable rules when it comes to withdrawals, early termination and transfer.

Pension fund

Contributions

Employee contributions towards a pension fund are tax deductible up 27.5% of pensionable income, subject to an annual maximum of R350 000. Many employers make it compulsory for employees to join its pension fund but provide staff with the option of contributing a percentage of their salary which is generally between 5% and 15% of taxable income.

Withdrawals/Early termination

Each pension fund is governed by its own set of fund rules in which the retirement date of the fund is set. In the event of resignation or retrenchment, a member has the option to withdraw the funds saved in his pension fund, although such withdrawal will be subject to tax. In general, however, a member of a pension fund may not access his capital prior to the fund’s retirement age, although an exception can be made in the case of ill-health or disability.

Transfer

If you resign from your employer, you have the option to transfer your pension fund interests to a pension preservation fund or to a retirement annuity. If you are moving to a new employer who has a pension fund in place, you can transfer your pension fund interests to your new employer’s fund, if the scheme rules make provision for this. You may not, however, transfer your pension fund interest to a provident fund without paying tax on it. You cannot transfer pension fund interests into a provident preservation fund.

Retirement

When you reach the fund’s retirement age, you have the option of taking a one-third cash withdrawal which will be taxed according to the retirement tax tables tables. Thereafter, you are obliged to use the remaining two-thirds to purchase either a life or a living annuity to provide you with a regular income during your retirement years. There are no tax implications when using your pension interests to purchase a living or life annuity, although you will be taxed on the annuity income.

Provident fund

Contributions

As in the case of pension funds, employee contributions towards a pension fund are tax deductible up 27.5% of pensionable income, subject to an annual maximum of R350 000.

Withdrawals/Early termination

As with pension funds, members are not permitted to make any withdrawals from the fund prior to normal retirement age. However, if a member resigns or is retrenched, they do have the option of making a full withdrawal. Depending on the rules of the provident fund, a member who is ill or disabled and unable to work may apply for early retirement.

Transfer

Upon resignation or retrenchment from your employer, you may transfer your provident fund interest to a retirement annuity or a provident preservation fund. If you move to a new employer who contributes to a pension fund, you can transfer the funds without paying tax. It is not possible to transfer from a provident fund into a pension preservation fund.

Retirement

As it currently stands, when you retire from a provident fund you are able to take a full lump sum withdrawal subject to the retirement tax tables. However, it is government’s intention to align the benefits of provident fund to those of pension funds, although this legislation has been postponed until March 2021.

Preservation Fund

Contributions

As a preservation is pre-retirement vehicle designed to preserve your retirement benefits when you leave your employer’s pension or provident fund. In terms of legislation, only money from an approved retirement fund can be invested in a preservation fund which means that no other additional contributions can be made towards the fund.

Withdrawals/Early termination

Preservation fund investors are able to make one full or partial withdrawal from the fund before retirement, which is normally set at age 55, subject to the withdrawal tax tables. This is a distinct benefit of a preservation fund, especially for those who are a long way from retirement and who fear they may need access to their capital sooner.

Transfer

A preservation fund investor can choose to transfer his fund to a different preservation fund, with not tax being payable on the transfer. A preservation fund can also be transferred to a retirement annuity on a tax-free basis.

Retirement

Members of a preservation fund can retire from the fund after the age of 55, bearing in mind that the rules for pension preservation and provident preservation funds differ. If you retire from a pension preservation fund, you are able to take a one-third withdrawal subject to tax, and the remaining two-thirds must be used to purchase an annuity. If you retire from a provident preservation fund, you still have the option to make a full withdrawal although legislation is scheduled for March 2021 to align pension and provident preservation funds in this regard.

Insurance RA

Contributions

Traditional retirement annuities are actually insurance policies which take the form of a contract between the insurer and the policyholder. As such, the contributions form part of the policyholder’s contractual obligations towards the insurance company. In the case of older policies, the policyholder might be contractually obliged to maintain his contributions at the contracted amount. However, newer products allow more contribution flexibility and choice, although the tax-deductible contribution amount is subject to the 27.5% legislated amount of your taxable income. As such, it is important to fully understand your insurance policy before committing to it.

Withdrawals/Early termination

As this type of RA is a policy, early termination is considered a break of the contract terms and the insurer may have the right to charge a penalty or early cancellation fees. If you are unsure what these fees are, your insurer should be able to provide you with a quote. Bear in mind that an early termination does not allow you to withdraw your funds, but rather to stop your contributions.

Transfer

You are able to transfer your policy RA to a unit trust-linked RA, although this should be done with the considered advice of a financial adviser. Such a transfer will need to take place via Section 14 of the Pension Funds and can take some months to complete. Before undertaking such a transfer, it is advisable to let your planner obtain a quote for the early termination of your policy to determine whether it is in your financial best interests to undertake the transfer.

Retirement

Owners of RA polices can retire after the age of 55, and have the option of taking a one-third cash withdrawal from the fund subject to retirement tax tables , with the remaining two-thirds to be used to purchase an annuity income. Investors have the option of using the full amount to purchase an annuity, although it is important to check your retirement cashflow position before committing all the proceeds to a compulsory investment.

Unit Trust RA

Contributions

Contributions towards unit trust-linked RAs are completely flexible. As an investor, you can set your contributions on a monthly, quarterly, bi-annual or annual basis, and you can make ad hoc contributions towards the fund. As in the case of pension funds, contributions are tax deductible up to 27.5% of pensionable income subject to the annual maximum.

Withdrawals/Early termination

Investors in unit trust-linked RAs have complete flexibility when it comes to stopping their contributions, but they are not able to make any withdrawals from the fund prior to have 55.

Transfer

RA investors have freedom of choice when it comes to their investment platforms and, as such, can transfer their unit trust-linked RA to another RA as they see fit. However, an RA cannot be transferred to a pension, provident or preservation fund.

Retirement

As in the case of policy RAs, investors have the option to use the full amount to purchase either a life or living annuity, or can choose to take up to a one-third lumpsum withdrawal subject to retirement tax tables.

General

All retirement funds which fall within the ambit of the Pension Funds Act, which includes provident, pension, preservation and retirement annuity funds, share some common attributes. For instance, assets housed in any approved retirement fund fall outside of one’s deceased estate and, as such, do not attract estate duty and are protected from one’s creditors.

Further, where the member of an approved fund emigrates prior to normal retirement age, he is permitted to access the full amount in his retirement fund, subject to Sars approval. In all instances, retirement funds are governed by the fund rules which are enforced by the fund trustees. This means that the distribution of your funds in the event of your death will be subject to the discretion of the trustees based on their determination as to who qualifies as your financial dependants.

ADVISOR PROFILE

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Crue Invest (Pty) Ltd

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