I have R880 000 in a Sanlam provident fund and R200 000 as an Echo Bonus from Sanlam. The money in the fund is pension from previous employment that was paid out. I am 45 and have a permanent job with its own pension fund. I have been working for this company for seven years now. I would like to take the funds from my provident fund to buy property cash and rent it out. The rent received would be put into the bond on my current house. Would you advise against this? Also, the R880 000 was moved from another provident fund to Sanlam about a year ago. I would like to know if the Echo Bonus would be paid out as well or only if I leave it there until retirement?
Trevor Lee - Rosebank Wealth Group (Pty) Ltd
Without knowing your full financial situation, it is difficult to give a definitive answer. However, there is enough information to give some general pointers. Certain assumptions have also had to be made including the fact that we have assumed no previous withdrawals from any pension schemes.
Let’s look at the preservation fund first.
Where possible preservation funds should always be used to provide for retirement. Any growth within the preservation fund is free of tax and since you will be 46 on your next birthday, the compounding advantages this could bring can be substantial.
With respect to this particular type of preservation fund (a Sanlam Echo Bonus scheme), you will also lose out on part of the echo bonus with early termination. The exact details will need to be discussed with your financial advisor or obtained directly from the company.
Taken from the Sanlam web page: “The Echo Bonus is an additional amount, which is added to the benefit payable at termination or retirement. It is a percentage of the sum of the invested amounts and the investment return increases with the term of investment.”
If you withdraw from the preservation fund, rather than retire from it (possible from age 55) there are also different tax tables that must be considered. This will have a detrimental effect on the withdrawal benefit available.
We have highlighted this below showing the current tax tables only and the impact this would have on a R1 million maturity value:
|Retirement fund lump sum||Withdrawal benefits|
|0 – R25 000||0% of taxable income|
|R25 001 – R660 000||18% of taxable income above R25 000|
|R660 001 – R990 000||R114 300 + 27% of taxable income above R660 000|
|R990 001 and above||R203 400 + 36% of taxable income above R990 000|
|Retirement fund lump sum||Retirement benefits|
|0 – R500 000||0% of taxable income|
|R500 001 – R700 000||18% of taxable income above R500 000|
|R700 001 – R1 050 000||R36 000 + 27% of taxable income above R7000 000|
|R1 050 001 and above||R130 500 + 36% of taxable income above R1 050 000|
|Gross amount||R1 000 000||R1 000 000|
|Tax||R207 000||R117 000|
|Net||R793 000||R883 000|
Buying property to rent out for income
Now let’s look at the other aspect of the question, using the proceeds from the preservation fund to purchase a buy-to-let scheme.
This would involve a totally different strategy than investing via a preservation fund. They are two vastly different ideas. The buy-to-let market can be notoriously difficult, yet, in ideal circumstances, it can bring substantial growth and income benefits.
Of course, more personal involvement would be necessary to manage the property; time frames would also have to be considered as well as the additional property fees and the current economic climate. Please remember that to purchase a new property you should always allow for between 8% and 10% of the purchase price of the property for all the other costs involved in purchasing a home (this amount excludes the deposit.)
The fact that you wish to purchase a new property to fund an existing bond would also bring complications. You have assumed that the buy-to-let property would bring in a regular net income over and above the ongoing fees of the new property.
Although no specific answers can be given here, in general we would not recommend that a preservation fund be terminated early and used to purchase a different investment vehicle.