I recently turned 55 and plan to continue working until I am 65. I have a number of retirement annuities (RAs) and preservation funds at different providers. Is it possible to retire from one RA only? I have been contributing to this RA since 1987. Reporting on this RA is poor, and I would like to retire early and turn it into a living annuity, or preserve it. The paid-up penalty is 30%, which, although allowed, I am unhappy with, as all fees and commissions surely must have been recovered after 30 years.
Sadly, the older RAs provided by life assurance companies, while providing tax benefits on contributions, were not investor-friendly. They typically had high costs, poor investment options and large penalties for discontinuing them or making them paid up. Fortunately, modern RAs provided by some respected investment houses as opposed to life assurance companies, don’t carry these burdens.
To answer your question: yes, you can retire from any one RA independently of any other retirement fund.
However, a 30% penalty is very hard to make up for through either increased performance or lower costs in an alternative arrangement.
If you were to have the RA paid up (with penalties) and formally retire from it i.e. turn it into an annuity, you would be able to take up to one-third as a cash lump sum. This amount will be taxed according to the retirement tax table as seen below.
If one was to retire from multiple retirement funds (RAs, pension funds, etc.) at different points in time, whilst taking a lump sum from each of them, then the lump sums would be aggregated to determine the applicable amount to apply to the above tax table. I strongly recommend that you get personalised advice on this before you decide to do anything, and ideally you want a tax directive from Sars to confirm the position.
The rest of your financial circumstances may impact this decision of whether to take a lump sum on retirement or not. There is a benefit to having discretionary funds as well as structured retirements funds as the one is treated differently to the other from a tax perspective. A mixture of both a discretionary fund and a retirement fund can help to maximise the tax efficiency of the overall portfolio and provide future financial flexibility, depending on your requirements.
If you were to have the RA policy paid up and formally retire from the fund then two-thirds of the fund would have to be converted into either a living annuity or guaranteed annuity. If you were to choose a living annuity then you are forced to take an annual withdrawal of between 2.5% and 17.5%. It is important to note that this is fully taxable as income in your hands.
With a penalty of 30% one could assume that the maturity date would be quite a few years away. I would recommend that you find an independent advisor who is able to manage the investment and report to you on the performance each year.
After the maturity date (provided that the policy isn’t rolled over) you have the following options:
- Leave it paid up, as is.
- Transfer it to a better service provider at no cost (a Section 14 transfer) – where it remains as an RA until you wish to retire from it.
- Exercise a retirement option with or without a lump-sum withdrawal, and turn it into an annuity with a better service provider.
It may be preferable from a reporting perspective to have all the retirement annuities and preservation funds transferred to one service provider where it can be more efficiently managed and reported on to you.
With 10 years to retirement you should probably be maximising your contributions to a retirement savings pool rather than retiring from a policy and triggering potential tax consequences and penalties.
The graph below shows the power of compounding over time. The years preceding retirement can account for a large portion of the return that the investment has generated over time. This would support the notion of leaving the RA to compound tax free over the next 10 years provided that the underlying selection of funds consists of top managers with long-term track records of consistent outperformance.
It is worth noting that every investor should seek personalised retirement advice well before their retirement date. It would be well worth your while to have an independent advisor take you through a detailed investment planning exercise in which they illustrate the amount of capital needed at the age of 65 in order to generate a sustainable income in retirement. They would then be able to show you a potential shortfall which you could address over the next 10 years.
Many an investor tends to base their retirement contributions on what their budget allows them to contribute comfortably without affecting their lifestyle. Contributions should be based on a sound financial plan for the future rather than a current lifestyle budget.