Q: I contribute to retirement annuities (RAs) on a monthly basis. The current value of the funds in these policies is R1.640 million and they’re held at PPS. I’m considering early retirement when I turn 62 next year and require some advice as to exactly how to deal with these funds. I’ve obtained a number of quotations, but I’m not happy with them. Should I call up the annuities at this stage and use the proceeds to invest elsewhere?
Vick Lallbahadur - Masthead Financial Planning
I’m glad to hear you’ve put away savings for your retirement. Please note that the following is not holistic advice – as there are a few variable aspects to this that I do not have information on – but I will guide you as best I can with what’s been provided.
With the RA by default you are already of retirement age, as governance projects the retirement age as 55. This means that if you choose to withdraw funds now (and assuming you have not made any previous withdrawals) you will only receive one-third of the total amount (R546 667). If you have not drawn from the RA in any way previously, the first R500 000 will be tax free, but tax will be applicable on the remaining R46 667. The reminding two-thirds MUST be used to purchase an annuity.
However, if your main concern is the performance of the RA in terms of interest, costs, or fund portfolios, (and depending on the RA rules of PPS) you can consider switching fund portfolios to effect better performance, or move the RA by means of a ‘section 14 transfer’ from the current RA to a new RA with new portfolio funds and performance.
Should you make use of the section 14 transfer, please note there will be fees payable to the advisor as well as a new minimum five-year term that you will need to abide by. The benefit of the transfer is that you do not attract taxes and you could receive better performance.
Bearing in mind that you are planning to retire next year, it would be advisable to keep the current RA running until your retirement date, then, if possible, use all funds to purchase your compulsory annuity to ensure you receive the best monthly income going forth. I say this considering that your chosen retirement date is just next year, which does not allow a new investment sufficient time to build good returns and considering that a new RA or investment will require a new five-year term.