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On retiring, can I pay my provident fund into an existing preservation fund?

Can I later make lump sum withdrawals from the preservation fund, pay withdrawal tax and leave the remainder in the fund?

I have now reached retirement age (63). I have a provident fund at my work and must take out my benefit.

At the date of retirement, can I:

  1. Take a partial amount from my work provident fund to pay off the balance on my bond?
  2. Pay the remainder of my work provident fund into my existing preservation provident fund without buying an annuity?
  3.  If point 2 is yes, can I later make lump sum withdrawals from said preservation fund, pay withdrawal tax applicable and leave the remainder in the preservation fund without buying an annuity with the remaining amount in the preservation fund, until such time as I want to buy a living annuity?
  4. Can my wife pay her retirement benefit from a provident fund (she has also reached retirement age at her work) into a separate preservation fund for herself after also making a cash withdrawal and keeping the balance in the separate preservation provident fund without buying an annuity, until such time as she has the need to buy a living annuity?
  5. We both have another job opportunity to keep us going on a monthly basis.
  6. Point 5 is the reason we want to keep our remaining retirement benefits (after making an initial cash withdrawal) in our own separate preservation funds.

I would appreciate it if you can give some guidance on the above and what the tax implications are upon each withdrawal.

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Can I at the date of retirement:

1. Take a partial amount from my work provident fund to pay off the balance on my bond?

Currently, a provident fund allows for a 100% lump sum withdrawal, before or at the point of retirement, or when leaving your employer’s fund. However, going forward provident funds will also be subject to annuitisation. The implementation hereof has been postponed by Treasury to March 1, 2021. What this means is that at retirement you will only be able to withdraw a cash lump sum of one third of your provident funds and it will be compulsory to purchase an annuity with the remainder of the funds. This excludes any vested interest in the provident fund before March 1, 2020.

Option 1

If you decide to preserve your capital in a provident preservation fund, you can make one withdrawal before retirement of up to 100% (to, for example, settle your mortgage bond). Pre-retirement lump sum withdrawals are, however, taxed in accordance with the table below:

Withdrawal benefit lump sum tax table

2021 tax year (March 1, 2020 to February 28, 2021) 

Taxable income Rate of tax
0 – R25 000​ ​0%
R​25 001 – R660 000 ​18% of taxable income above R25 000
R​660 001 – R990 000 ​R114 300 + 27% of taxable income above R660 000
​R990 001 and above ​​R203 400 + 36% of taxable income above R990 000

 All lump-sum withdrawals are taxed in aggregation over the lifetime of an investor. 

Option 2

If you decide to retire from your provident/preservation provident option (to access the allowable lump sum withdrawal at lower tax rates), first understand the different legislation that regulates matters such as divorce, sequestration and succession (liquidity and options at death) under:

a) The Pension Funds Act 24 of 1956 (regulating pension, provident and preservation funds)

b) The Long-term Insurance Act 52 of 1998 (regulating living and life annuities). 

All withdrawals before retirement will be taxed against the withdrawal table (as above), but at the time of retirement, the lump sum retirement table below applies.

Retirement and death benefits or severance benefits lump sum tax table

2021 tax year (March 1, 2020 to February 28, 2021) 

Taxable income ​Rate of tax
0 – R500 000​ ​0% of taxable income​
​R500 001 – R700 000​ ​18% of taxable income above R500 000
R700 001 – R1 050 000​ R​​36 000 + 27% of taxable income above R700 000
​R1 050 001 and above ​R130 500 + 36% of taxable income above R1 050 000

All lump-sum retirement withdrawals are taxed in aggregate over the lifetime of an investor.

Please don’t retire before someone has simulated your financial situation/retirement position up to age 100.

The only time I would encourage settling a bond out of after-tax retirement lump sum capital is when someone has significant excess liquidity in their post-retirement projection, something that is quite rare.

2. Pay the remainder of my work provident fund into my existing preservation provident fund without buying an annuity? 3) If the above 2) is possible, can I later make lump sum withdrawals from the said preservation fund, pay withdrawal tax applicable and leave the remainder in the preservation fund without buying an annuity with the remaining amount in the preservation fund until such time as I want buy a living annuity?

Provident funds generally cannot be added/amalgamated with existing preservation provident funds. However, if this is allowed, I do not recommend that you amalgamate two/more provident funds into one preservation provident fund if it will reduce your ability to make two separate withdrawals (from each of the original two provident funds).

3. Refer back to Option 1 (withdrawal) and Option 2 (retirement) under your first question regarding retirement access post the inception of your provident preservation fund.

Another question we frequently get asked is if an existing provident fund can be transferred to an existing pension/retirement annuity fund? It is advisable to not transfer provident funds to retirement annuities/existing employer benefit pension schemes, as you will forfeit the ability to withdraw 100% of your funds, and post-retirement withdrawals will be limited to one third (instead of 100%).

4. Can my wife pay her retirement benefit from a provident fund (she also reached retirement age at her work) into a separate preservation fund for herself, after also making a cash withdrawal and keeping the balance in the separate preservation provident fund, without buying an annuity until such time as she has the need to buy a living annuity?

Yes, the same rules apply to her as per option 1. The point of retirement (after age 55) for each individual from a provident preservation fund is 100% discretionary. Retirement investments are always connected to a specific individual and are kept separate for tax purposes. For example, disallowed contributions are kept on record in terms of the Income Tax Act and can be offset against the tax on lump-sum withdrawals/retirements lump sums or post-retirement income (Section 10C of the Income Tax Act).

5. We both have another job opportunity to keep us going on a monthly basis. Point 5 is the reason why we want to keep both our remaining retirement benefits (after making an initial cash withdrawal) to remain in our own separate preservation funds.

You could, at age 63, determine through thorough retirement planning whether retirement is a realistic prospect for you and your wife. I am generally against running ahead of time and taking irreversible future decisions (such as retirement) prematurely. I would encourage you (at current low-interest rates) to continue working at least until you have settled your bond from after-tax earnings, instead of using your after-tax pension money to do so.

That said, if you are going to settle your bond with retirement lump sum capital, I would suggest:

  1. Retire from your provident fund and take a cash lump sum as needed;
  2. With the remainder of the funds, acquire a living annuity; and
  3. From the living annuity only withdraw the minimum of 2.5% income per annum and reinvest this additional income in a retirement annuity for the most tax-neutral result.

This way you will save substantially on lump-sum taxes during withdrawal (compare ‘withdrawal’ with ‘retirement’ tables above).

This option also allows:

  1. Complete investment freedom from an offshore perspective, as retirement funds are subject to Regulation 28 of the Pension Funds Act, which determines that only a maximum of 40% of your funds may be invested offshore (of which 10% must be in Africa).
  2. At death, immediate liquidity can be provided to beneficiaries with several options for withdrawal.
  3. Living annuities can later be converted to life/hybrid-living annuities if needed.

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

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