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How to manage multiple RAs

Factors to consider when saving with GEPF. Reader’s question answered.

A Moneyweb reader has the following question:

I have two retirement annuities (RAs) from the same insurance company being paid off monthly and whose maturity date is 2023. Circumstances warrant that I resign from my public service job at the end of this year and, hopefully pursue other avenues. I would like to know:

1.Whether I am allowed to supplement each fund with a sizeable once-off portion obtained from my pension payout, while continuing monthly payments until maturity?
2.Whether this makes sound economic sense?
3.Whether I could make a similar bulk contribution to my ten-year unit trust investment also maturing at the same time?
4.The tax rate of a
Government Employees Pension Fund (GEPF) payout on resignation?
5.The best way of investing at least some of my pension payout, whilst remaining out of a job? And,
6.If I manage to quickly secure another job, how to preserve and grow my pension payout from my previous job?

Mduduzi Luthuli, co-founder and an executive director of Luthuli Capital, answers:

Dear Reader

People like you really give me hope for the financial future of our population. This might sound a little melodramatic, but the sad and painful reality is that less than 7% of all retiring South Africans do so with enough money to live a life they would have deemed fit. Now I’m not old, but my ‘youth’ doesn’t stop me from realising that I don’t want to suffer in my old age. I want dignity in my retirement. I want to be able to seek proper medical care when my body starts failing me and to access a healthy diet to prolong not just my life, but the quality of that life. I want to do the things that I was always too busy to do while working.

What is the point of working 30 to 40 years, being away from your family and friends, paying bills and working to the bone if it all ends in me being old with nothing, not being able to pass on any inheritance to try to ensure that those that come after me will have more resources than I did to try to realise their dreams? What was my legacy?

For those who are still reading, I’m simply trying to highlight the importance of sufficiently saving towards your retirement, of actively seeking to obtain financial independence and thus starting to dictate what life you want to live. Saving, investing and acquiring assets help you to purchase the only thing worth having…time, or rather, what to do with that limited time. What you do with your time makes up the sentences of your life story. It is very sad that such a small percentage get to actually write their own story.

Dear reader, I’m glad you’ve asked how to preserve and grow your money. It’s a question we all should be asking and I hope my answer helps to guide you to make an informed decision. Let’s begin.

Am I allowed to supplement each fund with a sizeable once-off portion obtained from my pension payout, while continuing monthly payments until maturity?

You currently have two RAs with a specific service provider. You’re retiring from your employer and want to transfer the payout into these RAs. I hope I’ve interpreted your situation correctly. The two RAs are already in your name, so the best thing to do is to speak to a wealth manager and ask them for help in consolidating them into one policy and align the asset allocation (investment strategy) to your new reality.

The tax benefits you obtain from an RA are not from having multiple RAs, but from the total collective amount contributed to your retirement savings. Since both RAs have the same maturity date, just have one. Seek clarity first, as this exercise might result in some termination fee charge and you’ll have to determine if that charge warrants such a consolidation exercise. You are allowed to make monthly and lump-sum premium payments to your RA until maturity. There’s no restriction on the contribution amounts, but it’s important to note that the amount considered for the tax rebate calculation on your RA is capped at R350 000 per annum.

Furthermore, transferring from a pension fund to your two RAs is a fantastic option from a tax benefit perspective, as the transferred amount will be transferred tax-free. It’s important though to note and consider what level of guarantee you have that you won’t need access to the funds prior to retirement age. Will you need to draw an income from these funds whilst looking for a new job? If so, it would be best to transfer a portion into a unit trust. This amount will be taxed, but at least you’ll have access to it.

The difference between an RA and pension fund: basically, pension funds are offered and administered by employers to employees, whilst RAs can be taken out in a personal capacity (even if you also have a provident/pension with your employer). If you are for example just starting out your career at a company that does not offer a provident/pension fund, it is imperative to speak to a wealth manager to set up an RA in your personal capacity. Should you then later in your career move to a company that does offer a pension, you can still continue with your initial RA, at which time it is advisable to speak to your wealth manager regarding available options.

A pension fund requires there to be an employer/employee relationship, a RA doesn’t. Do take note that you won’t have access to this transferred amount until retirement age if it’s transferred into an RA. So, yes you are allowed to supplement each fund with a lump-sum payment and make monthly contributions until maturity. There’s no restriction on the contribution amount, just the annual amount considered for the tax rebate.

Does the transfer make sound economic sense?

All contributions made to your pension fund and/or retirement annuity are for your retirement income, not for paying debts, buying a new car or home, or going on holiday. It’s that simple.

Now, let me get off my high horse. The reality is we all have debts; we all have financial problems that need to be managed and tendered to. Only you can answer if transferring the funds makes sound economic sense. It’s your life, it’s your money and you have to decide what is important to you. A wealth manager can only advise you on the available options – you have to pick the one that suits you best and live with the consequences of that decision. Please don’t spend this money if you can afford not to. Preserve the funds and invest them for your retirement – as much as you can.

Should I rather make a similar bulk contribution to my ten-year unit trust investment also maturing at the same time? 

If this money is purely for your retirement savings, then NO! Saving for your retirement should be done through a retirement vehicle such as an RA as it (an RA) gives you the following benefits:

  • 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 (if structured properly)
    • No executor’s fees (if structured properly)
  • Protected from debtors
  • Tax beneficial – allowable tax deductions before retirement
  • Favourable tax structure after retirement (if managed correctly)

The advantages of a unit trust is that you have no restriction in terms of accessing your funds. There is no maturity date on your unit trust, you have full liquidity from day one. An RA restricts you from accessing the funds prior to the selected retirement date. This is a good thing in my view as it forces you to have discipline even when it (discipline) doesn’t exist. You’re forced to wait until the selected retirement age in order to access your retirement savings. If the bulk contribution is for your retirement, put the funds in an RA not a unit trust. If the funds need to serve a different purpose, speak to a wealth manager and they will outline the differences between a RA and a unit trust and assist you in making the correct choice.

Also worth noting is that a unit trust doesn’t have to prescribe to the same legal investment limits a retirement fund has to. Here I’m referring to Regulation 28. When you invest in a retirement fund, Reg 28 of the Pension Funds Act limits the maximum exposure that you may have to various asset classes, for example: 75% in equities, 25% in property and 25% in foreign assets (with an additional 5% in African assets). 

The tax rate of a GEPF payout on resignation

Withdrawals from a pension fund are taxed as per the below tax table. From time to time Sars may choose to update or alter the table, so seek help from a wealth manager to assist you in obtaining the correct tax table and doing the tax calculation. Tax relief on retirement lump sum benefits is allocated once in a lifetime – in other words if it’s used up, you can’t claim it again. 

Withdrawal benefit: 2017 tax year (March 1 2016 – February 28 2017)

Taxable income/ lump-sum payment to bank account (R)

Rate of tax (R)

0 – 25 000

0%

25 001 – 660 000

18% of taxable income above 25 000

660 001 – 990 000

114 300 + 27% of taxable income above 660 000

990 001 and above

203 400 + 36% of taxable income above 990 000

 

The best way of investing, at least some of, my pension payout whilst remaining out of a job?

I simply don’t have enough information to properly answer you. I’m assuming you want to know how to best invest these funds so as to be able to draw an income from the funds whilst not depleting the actual capital? This will be largely determined by how much you have to invest, how much you want to draw as an income and for how long you need to draw that income.These are questions I unfortunately don’t have answers to.

What you’re actually asking me is how to structure an income fund. Again, this can easily be done but I can’t answer you correctly without knowing more information. Consult with a wealth manager and you will get an answer to this question, I promise you that. It’s a simple question of asset allocation and product suitability for your specific need and situation.

If I get another job, how do I grow and preserve my pension payout?

Fantastic question: it allows me to end discussing preservation funds. To give your question more perspective I’m assuming you’ll then be contributing further towards your retirement through your new employer’s pension fund. You thus won’t be needing to contribute further to this pension payout and just need the funds to be invested until your maturity date, 2023. The perfect vehicle is a preservation fund. Let’s discuss why:

 

  • You can transfer a minimum amount of R50 000 to a preservation fund, but it doesn’t allow any further contributions once the funds have been transferred in. This transfer is referred to as a section 14 transfer.
  • With regards to access to the funds, this will depend on your original fund and whether you have already withdrawn any funds from the retirement savings you are transferring to the preservation fund. If you transfer to a preservation fund and you have not already withdrawn a portion of the funds at transfer stage, you may be allowed a single withdrawal before you reach 55. Remember when transferring from a pension fund to a preservation fund, you’re not forced to transfer 100% of the funds and may elect to have a portion of the full fund value paid to you as cash. This cash portion will be taxed as per the above tax table. Some funds impose restrictions on the amount you may take. You will be taxed on this withdrawal and this will affect your tax rate if you also take a cash amount at retirement. 
  • You do not need to pay tax on the capital gains, interest or dividends the preservation fund earns. You will be taxed on any cash amount taken from the preservation fund.

 

I hope the above gives you at least a reasonable direction to start taking further action. As always, consult with a wealth manager so you may obtain proper guidance.

Mduduzi Luthuli is head of wealth management at Luthuli Capital.

 

If you have a question that you’d like to submit to one of the advisors listed on Moneyweb’s Click-an-Advisor section, please contact eleanor@moneyweb.co.za

ADVISOR PROFILE

Mduduzi Luthuli

Luthuli Capital (Pty) Ltd

COMMENTS   4

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can you give a guideline on what fees are charged by RA’s and preservation funds?

The statements “insurance company being paid off monthly and whose maturity date is 2023” and “ten-year unit trust investment also maturing at the same time” make me very worried for you. Get really good financial advice (on an hourly fee basis) on this because you have obviously sacrificed to save, it would be terrible to lose out on large parts of the benefits you have accumulated for yourself due to a strategic error.

Your RAs could be simple ‘investment account’ type RAs or they can be ‘insurance policy’ type RAs and these insurance type RAs might have various insurance products bundled up into the contrat=ct. Insurance type RAs can have significant penalties for stopping contributions.

Check what penalties there are for missing payments between now and 2023 or making your RAs ‘paid up’ (some people refer to this as making the account/contract paid up) and consider that some of the insurance elements of the contract might fall away if you stop contributing. If there are any significant penalties, check what the impact of a once off contribution would be. It may be that if you make a once off contribution next year but then later circumstances change and you can no longer contribute for whatever reason, you can end up paying the exorbitant/immoral penalties on the entire RA (even including the once off contributions which you were never obliged to make contractually). You might be in an account which locks in ridiculous fees, which your adviser should consider before contributing more. The account / contract may have been created years ago and what is available in the market has changed since then. Financial adviser will be able to make the assessment / spreadsheet.

There are so many easy ways to open accounts (including RAs, or preservation funds) with various institutions which are not insurance salesmen, you can even buy unit trusts as unitised provident funds for the tax benefit from many companies that are not insurance salesmen either.

You can have multiple RA accounts or multiple preservation fund accounts even with the same provider (they are treated in aggregate for tax purposes). This allows you the flexibility of retiring from one account and drawing an annuity income while continuing to contribute to the other.

If your RAs have steep penalties which you never want to pay and it makes financial sense to keep these RAs going, consider creating an emergency fund invested in a regular unit trust account. You can access this with 4-7 days notice, and this would allow you to keep paying your RAs (therefore avoiding penalties) if the unexpected happens.

What a great, comprehensive answer, Mduduzi! Wouldn’t mind having you as my financial planner.

There are a number of errors in the above response. 1) The GEPF benefit cannot be split into a withdrawal and a preservation portion. It’s all or nothing. 2) That portion of the withdrawal benefit that relates to pre 1 march 1998 service is not taxed. 3) As a general rule, if the member makes a withdrawal from his fund before preserving the rest, they still have the option of one further (full or partial) withdrawal from the preservation fund before retirement date. 4) GEPF members cannot make a partial withdrawal before transferring to a preservation fund and they can only withdraw up to one third from their preservation fund thereafter.

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