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When investors need access to their investment capital

A look at the degree of flexibility offered by different investment products.

Over the last 18 months, many investors have had their investment goals and planning upended.

Many such investors, having previously structured their planning with a specific goal or investment horizon in mind, have not had the luxury of sticking to their plans. Some have been forced into retirement or have suddenly had to use their long-term savings to fill short-term gaps. The focus shifted to the degree of flexibility available to them, and especially on the liquidity of specific investment products.

The general investment environment is made up of a wide variety of products. We’ll focus on a few of these products that are central to many investors’ financial planning:

Retirement annuities

As a rule, withdrawals from retirement annuities are not permitted prior to retirement. Exceptions to this rule are when the member has stopped making contributions and the fund value is less than R15 000, or the investor has moved abroad and has not been a South African resident for tax purposes for three consecutive years.

An investor qualifies for retirement at the age of 55, whereupon they gain access to a maximum of one-third of the retirement annuity fund value. In terms of the applicable legislation, the remaining fund value must be transferred to a compulsory annuity (life annuity or living annuity) from which the investor will be paid a taxable annuity income. However, If the fund value does not exceed R247 500 at retirement, the one third withdrawal limit falls away and the full value can be withdrawn in cash.

Subject to the fund rules of the product in question, the investor may also qualify for early retirement due to disability.

Preservation funds 

Preservation funds allow for a single taxable withdrawal to be made over the life of the fund and before the investor retires. This can be a partial or full withdrawal. However, as in the case of a retirement annuity, an exception is made for an investor who has moved abroad and has not been a South African resident for tax purposes for three consecutive years. Such an investor can apply to withdraw the full fund benefit, even if they have already made use of the one-time withdrawal prior to retirement.

For the most part, an investor will qualify for retirement from age 55, though the applicable retirement rules will correspond with those of the retirement fund from which the funds were initially transferred.

Preservation funds permit a retired investor to withdraw a maximum of one-third of the fund value in cash. The remaining fund value must then be transferred to a compulsory annuity (life annuity or living annuity), from which the investor will receive a taxable annuity income. Should the fund value not exceed R247 500, the investor is not limited to the one-third of fund value restriction and may take the full fund value as a taxable withdrawal.

The fund value of certain preservation funds – such as a provident preservation fund – may, in some cases, include a vested amount that the investor may withdraw in full and in cash upon retirement. This vested component of the investment relates to the Taxation Laws Amendment Act of 2020 which came into force on 1 March 2021.

Living annuities

Living annuities are compulsory annuities that provide the investor with an annuity income after retirement. They are market-linked investments the underlying portfolio value of which may increase over time if the investor’s annual withdrawals are lower than the growth rate achieved by the portfolio. Investors may select the withdrawal percentage annually and this may vary between 2.5% and 17.5% of the fund value. Withdrawals are not necessarily monthly – the frequency can be monthly, quarterly, semi-annually or annually. While no further withdrawals are permitted, a taxable withdrawal of 100% of the portfolio value is allowed should the underlying portfolio value be less than R125 000.

Life annuities 

Life annuities are compulsory annuities that provide the investor with annuity income after retirement. The investor ‘buys’ a lifetime income with their available retirement funds and, in effect, receives a guaranteed income in exchange for the capital value. The product does not usually include an investment component, meaning that the lifetime income represents the only funds that will be made available. 

Unit trust investments 

Unit trust investments are liquid funds and they permit unlimited withdrawals to be made, regardless of the investment horizon initially anticipated. 

Tax-free savings plans 

The investments underlying tax-free savings plans remain liquid and can be withdrawn at any time, regardless of the investment horizon initially planned for.

This product is limited to a maximum contribution of R36 000 per tax year (and a lifetime limit of R500 000) per individual.

Should an investor make a withdrawal from the investment but then wish to redeposit the withdrawn funds during the same tax year, the amount redeposited will be seen as a new contribution. 

Endowment policies 

Endowment policies normally allow for unlimited withdrawals after the initial limited term of at least five years. In the first five years, withdrawals are usually limited to one interest-free loan and a one-time withdrawal. Some endowment policies can be structured to allow for more withdrawals.

Withdrawals from investment products are sometimes accompanied by a tax liability and/or other costs – investors should discuss this matter in more detail with their wealth advisors. Investors are also encouraged to contact their advisors if there are any changes in their circumstances or needs in order to ensure that their investment portfolios remain in line with their needs.

ADVISOR PROFILE

Tanya Joubert

PSG Wealth Pretoria-East

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