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Post-resignation, what’s the best option for retirement funds?

Reader wants to ensure a safe retirement and to pay the lowest tax possible.

A Moneyweb reader asks:

I want to resign and have approximately R3 million with the Municipal Gratuity Fund (MGF) at the municipality. What’s the best option for this money, to ensure a safe retirement and pay the lowest tax possible?

Dez Tswaile of Masthead Financial Planners answers:

Resignation or resigning from full-time employment is not an easy decision to make, let alone acting on it. My inclination is that one has to really consider both the pros and cons of the effect of the action. Before I answer the question, I would like to remind you of the difference between retirement and resignation in reference to the tax treatment between the two options.

Tax treatments of retirement provisions

Your fund is a dynamic defined contribution fund, which in simple terms is a pension fund with provident fund rules. When you retire or resign as a member of this type of fund you are allowed to take (commute) a portion of your retirement interest (accumulated contribution and growth) and or all of it (up to 100%) should you wish to take the money as a lump sum, subject to tax as per the tax tables published by Sars. This fund also provides for a transfer of the money into a pension preservation fund subject to a zero-tax bill, however your money will be taxed at appropriate tax terms at withdrawal.
 
Instead of making a lump sum withdrawal, you may also choose to purchase a living or life annuity at retirement age; this will pay you an annuity income (please consult with your financial advisor to help you understand the difference between the two annuities) and then you would be subject to income tax at an appropriate level per the income tax table from Sars, where there are also a few exemptions applicable.

Tax is calculated on the gross retirement fund lump sum benefit after having taken into account, for example, contributions to a fund which did not previously rank for deduction or which were not exempted from normal tax. Basically, what this means is that an individual is entitled to claim a deduction of contributions made to certain retirement funds. However, these contributions, for tax purposes, are subject to limitation.

If the deduction is limited, the amounts are carried forward to the following year of assessment and are compounded. When the individual retires, for example, the compounded or excess contributions that did not previously rank for deduction or which were not exempted, can be used to reduce the gross lump sum figure on which the tax will be calculated.

It is important to note that all lump sums received from a provident fund, whether as a result of retirement or not (and from an employer in respect of a severance benefit) are taxed on a cumulative basis. The significant impact of this is that, when you eventually retire, the total value of the lump sum benefits you receive after October 1 2007, will be taken into account when calculating the tax payable on your current retirement fund lump sum benefit.

Please note the information provided above does not constitute financial advice, but is generic information that is applied and used in the context of your questions.

I would strongly recommend that you consult with an appropriately qualified and experienced advisor to discuss your circumstances in more detail to determine what your income needs are, post retirement age, understand your objectives more clearly and also the term (period) needed for both preservation and income purposes in order to guide you on which appropriate funds you can transfer your benefits into.

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