My preservation provident plan is with one of the majors, and split in three funds, according to my instructions. All are doing fairly well, even after the exposure to Steinhoff International (SNH). There is no real requirement to touch the preservation fund, which has been active since 2012, and has shown fair to marginally good growth.
I am 58 years old, and run a small business.
The question is
1) Do I take the first relative low base retirement lump sum of the provident plan, having not previously cashed provident or pensions in my life, taking the net R919 500 of R1 050 000 after tax, on the sheer assumption that Sars will shortly, sooner rather than later, increase and adapt the tax structure which has been in place for a few years? The objective would be to leave the balance of the funds in the preservation provident plan, mainly due to tax implications on further withdrawal, given the backdrop of fair to good growth.
As Sars is a hungry animal that has not been fed, it seems that the increased tax may be inevitable?
Instead of annuity investment with the withdrawn taxed R919 500, to avoid the stock exchange for a change, to challenge the belief that stock exchange investments are the be all and end all, have you any suggested avenues of investment to explore, along these lines?
Looking at your growth over the past three years, it’s necessary to bear in mind that 2015 and 2016 were low-growth years i.e. most growth would have been achieved since July 2017. The expectation going forward should be decent growth, assuming the funds you have selected are good growth funds.
Unfortunately, the information you have provided does not mention other assets besides the business you are running. If I assume there aren’t any other investments, then cashing out a portion of your provident preservation fund and paying the tax (effective tax rate on withdrawal is 12.42%), is not a bad idea. This gives you and/or your financial advisor the opportunity to structure the withdrawals from the discretionary investment along with your remaining living annuity to reduce your tax rate on income withdrawn.
The income drawn from the discretionary investment is not taxable (however, capital gains and interest income are taxed), while withdrawals from a living annuity (assuming the remainder of the preservation fund is transferred to a living annuity when you retire from the fund) could be taxable.
To use the preferential rates used in your calculations, you need to keep in mind that you need to retire from the preservation fund. The balance not withdrawn thus must be transferred to a living or guaranteed annuity from which you need to draw between 2.5% and 17.5% according to current legislation. This withdrawal is compulsory even though you may not need the money. A benefit of this transfer is that the funds in a living annuity no longer need to comply with the limitations of Regulation 28. Offshore exposure as well as increased equity exposure could improve the growth on the investment over the long term.
I think the reason for the withdrawal is, or should be, increased flexibility when drawing an income from the two investments and less focus on possible future changes in tax legislation.
In my opinion changing the tax rates on retirement funds would have the knock-on effect of not encouraging saving for retirement, which is very low in a South African context; thus, I think these rates will not be amended. Never say never, though. Playing the cards on the table is most often the best we can do. As many expected tax changes often don’t materialise, it’s dangerous basing a strategy on expected tax changes.
I would consider investing the withdrawn funds in equities or funds that have equity exposure. There is sufficient research that shows that equities yield the best returns compared with other asset classes over the long term. To address the ‘sequence of returns risk’ it may be prudent to invest your income requirements for the next 12 to 18 months in lower-risk funds or income funds.
If however you are adamant that you want to avoid equities, there may be some income funds that generate decent returns because of investments like preference shares of corporate companies that yield good returns. It is necessary to keep a close eye on these funds, as the underlying investments in the funds are normally interest-rate sensitive.