Q: I would like to know if at retirement it is possible to transfer my pension fund maturity value into a personal retirement annuity?
If so, what would the tax implication on the lump sum transfer be?
A: The simple and short answer to your question is no, you can’t ‘retire” into an RA. However, although it is not commonly seen or done, you may be allowed just prior to retirement (or at retirement age) to transfer your pension lump sum into a personal retirement annuity (RA).
We must make a clear distinction though.
You would not retire from the pension fund and ask that the funds be transferred into an RA. Rather, you would withdraw from the pension fund and then opt for the funds to be transferred into an RA. Also, ask your HR manager for the pension fund rules, as these will stipulate if a withdrawal is allowed once the retirement age has been reached.
If you’re not ready to start drawing an income from your maturity value, want to postpone your retirement to a later date and would like to still contribute and grow your retirement pot, looking at a retirement annuity is a viable and tax-efficient option. You can make contributions to a retirement annuity fund. These contributions may be tax-deductible. The transfer to the RA will be done free of tax, meaning no tax will be deducted on the full fund value. This transfer is called a Section 14 transfer. It is important to note though that Section 37D of the Pension Funds Act does permits certain deductions from a member’s retirement fund benefit. These are:
- Amounts due in respect of housing loans, granted by the fund/employer or for which the fund/employer agreed to stand surety;
- Pension interests awarded to former spouses on divorce;
- Maintenance claims awarded against the member and the fund;
- Damages due to an employer caused by a member’s misconduct;
- Amounts specifically approved by the registrar.
When an employer claims for damages, it often pulls the fund administrator into the dispute between the employer and the member. The fund administrator cannot however be the arbitrator in such disputes, nor exercise their discretion. Our courts and the Pension Funds Adjudicator apply the provisions of Section 37D of the Pension Funds Act very strictly, so they are obligated to do the same.
What is a Section 14 transfer?
The term ‘Section 14 transfer’ is a legal process. It is the transfer of retirement fund benefits from one retirement fund to another in terms of Section 14 of the Pension Funds Act. It is a compulsory transfer that takes place when your benefit in a fund is moved to another fund because:
The fund (employer) is responsible for all the legal documents. The Financial Services Board (FSB) has put checks and balances in place to make sure that members are not disadvantaged when their money is transferred. The fund must make sure that members are informed about and agree to a compulsory transfer and that the full values of their benefits are transferred. The Section 14 transfer must also be clear about when and how interest, if any, will be added to the benefit.
How long does it take?
The fund must submit the application for the Section 14 transfer within 180 days after the effective date of the transfer to the FSB. The money must be paid to the transferee fund (your RA) at least 60 days after the FSB approves the transfer. A Section 14 transfer is usually a lengthy legal process because of the paperwork involved. It can take even longer to finalise if the FSB has a query.
The real benefit of retirement savings
- No capital gains tax paid by fund (four fund approach)
- Retirement money does not form part of your estate (you can accumulate a huge amount of wealth without being “penalised” for being wealthy)
- No estate duty
- No executor’s fees
- Protected from debtors
- Tax beneficial – allowable deductions before retirement
- Favourable tax structure after retirement (if managed correctly)
- Effective pre-retirement wealth structuring allows use of both spouses’ tax base
What is the difference between an RA and a pension fund?
The primary difference between an annuity and a pension fund is that a pension fund comes from a person’s employer (a working relationship must exist between an employer and employee).
In the case of annuities, these are a separate set of products that anyone can buy – not just those who work at a particular place. It is also possible to supplement income from a pension by buying an annuity, or even to use the funds from a pension to buy an annuity that might have better terms.
In any case, pensions and annuities both support retirees, but originate from the employer and the individual, respectively.
The terms for the pay-out from an RA are similar – if not the same – to a pension fund, so opting for the maturity funds to be transferred into an RA won’t prejudice you negatively in terms of access to the funds.
When you take out the RA, you must decide at what age the policy will pay out to you. This age is called the ‘maturity age’ and in most cases, it ranges between 55 years to 70 years. The minimum age is 55 years so that you are not tempted to use the money before you have actually retired. You won’t have access to the money before you’re 55 unless you become permanently medically disabled.
Mduduzi Luthuli is head of wealth management at Luthuli Capital.
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