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Can all my investment allocations in my provident fund be invested offshore?

Unfortunately not. The best thing is to look at the total allocation of your provident fund to ensure the maximum of 30% offshore exposure is fully utilised.

For the past five years, I have been contributing to a provident fund at the 14% minimum as per policy rules. Following are my questions:

  1.  Is there a way I can pay tax, not contribute to a provident fund at all and invest the contributions somewhere like offshore funds?
  2. My provident fund is with Old Mutual. Can I ask that all my investment allocation be invested in offshore investments to get maximum returns?
  3. In the next two to three years if I change jobs, am I allowed to withdraw all my provident fund savings?
  4. If I switch jobs post-April 1 2021, am I allowed to withdraw my full amount? I hear a new law may limit me to withdrawing one third and with the balance, I would need to buy an annuity. Is this rule applicable to me?

Please advise.

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1. Is there a way I can pay tax, not contribute to a provident fund at all and invest my contributions somewhere like offshore funds?

This is going to depend on what your employer’s rules are. If it states that it is compulsory to contribute to the company provident fund if you are permanently employed, then you will, unfortunately, have to contribute to the fund and you will be limited within your provident fund due to Regulation 28. Pension and Provident Funds are managed according to Regulation 28 (under the Pension Fund Act) which limits total equities in the portfolio to 75% and, within that, limits 30% to offshore assets.

If you don’t need to contribute towards the provident fund, then you can request that you no longer contribute towards the provident fund and instead save your money in a discretionary investment privately where you are not limited by Regulation 28. Just remember that if the rules allow for this and you do not have to contribute towards a provident fund, this will increase your taxable income and you will pay additional income tax. Sars allows for our taxable income to be reduced by our contributions towards pension funds, provident funds and retirement annuities (capped at the lesser of 27.5% of the greater of your taxable income or remuneration and limited to R350 000 per year). With discretionary investments, you also need to remember that you will pay capital gains tax on any growth once the units are sold/switched off. In a retirement vehicle like a provident fund, no capital gains tax is payable. 

2. My provident fund is with Old Mutual. Can I ask that all my investment allocation be invested in offshore investments to get maximum returns?

No, unfortunately you will not be able to allocate your full portfolio to offshore funds. Your provident fund is limited by Regulation 28 (which is part of the Pension Fund Act). This regulation was set in place to protect the member’s retirement provision and to encourage diversification of the portfolio. Diversification of different asset classes in a portfolio helps to reduce the risk of the total portfolio. The goal of Regulation 28 is to reduce the risk on the retirement money so that the member does not unnecessarily lose capital.

Regulation 28 limits the extent to which retirement funds (including provident funds) may be invested.

The limitations are as follow:

  • Equity: 75%
  • Listed property: 25%
  • Offshore: 30%
  • Hedge funds: 10%

The best thing is to look at the total allocation of your provident fund and if the maximum of 30% offshore exposure is not fully utilised, to request that they change your underlying funds.

3. In the next two to three years if I change jobs, am I allowed to withdraw all my provident fund savings? 

Yes. At resignation you have the following options:

  • To transfer the full or a partial amount to a preservation provident fund, new work pension or provident fund or a retirement annuity; or
  • Withdraw a portion or the full amount in cash. Just remember that you will be taxed according to the withdrawal benefit tables as shown below. This is a once in a lifetime benefit. In other words, if you withdraw R600 000 now and you want to withdraw R500 000 in the future before retirement, the amount will accumulate and you will pay a higher tax. In other words by the time you withdraw the R500 000, the R500 000 will be taxed in the third tax band (R660 001 – R990 000) because of your previous withdrawal. This will also negatively impact you when you retire as it will reduce your available tax-free portion.

 2021 tax year (March 1 2020 – February 28 2021)

Taxable income (R)​ Rate of tax (R)​
1 – 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

4. If I switch jobs post-April 1 2021, am I allowed to withdraw my full amount? I hear a new law may limit me to withdrawing one third and with the balance, I would need to buy an annuity. Is this rule applicable to me? 

No, not at resignation (unless you are above the age of 55). The restriction for annuitisation is currently set to March 1 2021 and applies to retirement. It has been postponed previously. It might be possible that they will extend this date again. It will depend on when the date is finalised.

You will still be able to withdraw the full amount from your provident fund if you choose to resign before the age of 55 (even with the new restrictions). Just remember that you will be taxed before retirement on the withdrawal tax table as listed above. If this rule does come into effect, a provident fund will work in a similar way as a pension fund. You can then still withdraw (full or partial) from the fund when you resign from the fund before the age of 55 years, but you will be limited to withdrawing only a third once you retire and will be forced to buy a qualifying annuity with the remaining amount. Currently, members of a provident fund are not obliged to buy an annuity with the remaining amount at retirement and until this date is finalised this will remain unchanged.

Do you have any questions you would like answered by registered financial planners?

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