I am 58 years old and have R4.5 million in two retirement annuities. I wish to take R500 000 out tax-free, and then transfer the rest into a living annuity, which is not subject to Regulation 28. What are the tax implications, if any, of the transfer? Does Section 14 apply?
Adam Bacher - Adam Bacher & Associates Wealth Management
Yes, in terms of the Income Tax (ITA) you may retire from your retirement annuities any time after reaching the age of 55, and you may access the R500 000 at nil-based tax on the retirement lump sum benefits tax tables. There are a few factors to consider though.
In terms of the act, any retirement fund lump sum benefit will be taxed according to the retirement tax table, after taking into account:
- Contributions to a retirement fund which did not previously rank for deductions or were not exempted from tax, and
- Pre-March 1998 public sector benefits.
You should be aware that when determining the tax on the current retirement fund lump sum, all previous lump sums received (withdrawal benefits received after March 2009, retirement fund lump sum benefits received after October 2007, and severance benefits received after March 2011) will also be taken into account.
The balance that is transferred to a living annuity is transferred on a tax-neutral basis – including any disallowed contributions under Section 10C of the ITA that may be used to reduce tax on your living annuity income. The transfer of your retirement annuity as a result of retirement to a living annuity is not subject to Section 14 of the Pension Funds Act, which states that “a Section 14 transfer is the transfer of retirement fund benefits from one retirement fund to another”.
The living annuity is not subject to Regulation 28 of the Pension Funds Act as it is regulated by the Long-term Insurance Act.
Sometimes the reason for someone retiring to a living annuity as soon as they hit the 55-age landmark is to avoid the limitation that Regulation 28 in retirement annuities imposes with regards to accessing various investment asset classes. It seems that after five to six years of very disappointing returns in most portfolios that have to adhere to Regulation 28 limitations, which only allow limited access to offshore asset classes, patience has worn thin. The result is that some investors in retirement annuities are retiring from them and moving across to living annuities to have much higher access to offshore investment options through rand-based offshore funds in the living annuity. If there is capacity with the life company that owns the living annuity, you can actually have up to 100% offshore exposure.
The word of caution I would give to investors taking this route is that while returns from offshore funds generally have been significantly higher over the last while and the access to some great global companies is always a benefit, one has to try to look forward and not backwards and the possibility of investing mainly in offshore markets that seem to be very expensive must be taken into account against the added volatility this may bring.
If a person is retiring from a retirement annuity in their mid-50s, they must also take into account that, with longevity numbers going up and up, their capital will need to last a substantial length of time, so a well thought out income and asset allocation strategy needs to be put in place.
Please note that the information provided above does not constitute financial advice. Generic information has been applied given the context of your question. We have limited details about you and your circumstances – such detail may impact any advice provided and we would recommend you discuss these issues a trusted financial advisor before making decisions.