I am planning to move my pension to a preservation fund, since I have been retrenched. I have not made a decision yet regarding which institution to select or how to diversify my portfolio. Could you please assist?
You are definitely making the right decision – preserving your pension fund is the best way to ensure that you keep your retirement savings on track. When deciding which provider to choose, it is important to know what providers can and cannot offer you. All the product providers are subject to the same regulatory framework, so there are some characteristics of your preservation fund that will be the same, irrespective of which provider you choose.
Firstly, let’s cover the main features of a pension preservation fund that are not flexible:
- Your funds will move from your pension fund to your preservation fund, without incurring tax.
- Prior to retirement, you may make one withdrawal from your preservation fund, which will be subject to tax.
- Your investment will be subject to Regulation 28 of the Pension Funds Act. Regulation 28 is a set of rules that restricts the maximum exposure retirement investors may have to certain asset classes. For example, members of retirement funds may not have more than 30% offshore exposure in their retirement products. These rules are intended to protect investors from being exposed to excessive levels of risk in their retirement savings products, but their practical application may hinder some investors from reaching their investment goals.
- You will be able to retire from your preservation fund at any time after the age of 55.
- When you retire, you will be allowed to take up to a third of your benefit in cash (subject to taxation*) and two thirds will be applied to provide you with a regular income after retirement.
* You may receive up to R500 000 free of tax from your total combined retirement savings during your lifetime.
Now let us look at the important things you need to establish before choosing a product provider:
- What are the administrative charges in the preservation fund? These charges are usually expressed as a percentage of your investment amount and may be charged at the onset (‘initial fees’), during the lifetime of your investment (‘annual/trail fees’), or as a combination of the two.
- Do you have access to a wide range of underlying investment funds from various managers, or are you tied to the product provider’s funds? A restricted list of funds is not necessarily an obstacle, provided you still have the ability to diversify your portfolio across various asset types and a smaller variety of funds, and must definitely come with lower administrative fees. Take special care to ask your provider whether you will have access to a wide range of offshore investment funds. Different providers apply Regulation 28 (mentioned above) in different ways, so you need to know up front whether you will be allowed to invest in direct offshore funds within your preservation fund. This is especially important if you have a larger portfolio that needs a lot of offshore exposure to remain well-balanced.
- Will you receive professional, independent advice when you need to make important investment decisions? Some providers will have in-house advisors who represent the product provider and who can make recommendations to you based on the particular provider’s products. Some providers will allow you to appoint your own independent financial advisor who has the freedom to recommend funds from a very wide range of mangers. Again, the one is not necessarily better than the other, but make sure you know what you are paying for when it comes to advice. Many investors do not mind paying a bit more for independent advice and a wide range of investment options.
With all of the above in mind, we would be hesitant to name a particular product provider as ‘the best’, because it is very dependent on your personal needs. We strongly encourage that you speak to a financial advisor before selecting not only the product provider but, more importantly, when you need to select your underlying investment funds.
Choosing to preserve your benefit was the first step in the right direction and selecting one product provider over another could possibly impact your investment outcome. But being invested in the wrong underlying funds will definitely stop you from reaching your retirement goals.