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What access do you have to your retirement money?

Can you access more than one third of your pension fund and do you have to buy into a retirement annuity?
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My uncle took early retirement at 55 years old. His employer said he had two options:

  1. He gets one third of his pension money and then gets a monthly income; or
  2. He can cash out his pension

He wanted to go with option two, so he went to Old Mutual to find out if he can get a preservation account with them. He was told it’s possible, he can diversify his funds with them.

Then he went to a bank to find out what products are available if he wants to invest his pension money with them. He was told that he can only access one third of the pension fund and the rest must be used to buy an annuity. He cannot cash it out.

He is confused as to which information is correct: can he access more than one third of his pension fund and invest it in different portfolios, or can he only access one third of the pension fund money and then the rest must be used to buy a retirement annuity?

Mike Lombard - Pfire

Understandably, this can sometimes be confusing and frustrating. So, let’s clear this up for your uncle:

From the age of 55 years your uncle can ‘retire’ from his pension fund. On his retirement he has the following options:

  • He can transfer the entire pension fund to a preservation fund, no matter what the value of the fund is – tax free. Once it is in this preservation fund he can select multiple investment portfolios that match his risk profile to continue to grow his money until he needs access to it. The purpose of the preservation fund is to preserve the money so that it can be cashed in at a later date. In other words, if your uncle does not need access to any of the funds now, this is the ideal place to park it.
  • He can cash in his entire pension fund, provided the balance of the fund is below R247 500. This will be subject to income tax, which is explained below.
  • If his pension fund is over R 247 500, he can withdraw up to a third of the fund in cash and the balance of the funds (two-thirds) must be used to purchase a compulsory annuity. The compulsory annuity will then pay him an annuity (or pension) each month (can be paid quarterly and/or annually as well). This payment is also subject to income tax, which is explained below.

Whether your uncle draws a third in cash or is able to withdraw the full amount, such a lump sum withdrawal will be subject to income tax. Sars also provides for a portion of the lump sum withdrawals to be exempt from tax. The rates below will apply, if your uncle has not previously withdrawn or retired from any other retirement fund. If he has, then this will affect the tax on his current retirement from his present pension fund.

2018 tax year (March 1 2017 – February 28 2018)

​Taxable income (R)

​Rate of tax (R)

0 – 500 000

0% of taxable income

500 001 – 700 000

18% of taxable income above 500 000

700 001 – 1 050 000

​36 000 + 27% of taxable income above 700 000

1 050 001 and above

130 500 + 36% of taxable income above 1 050 000

The pension or annuity that he would receive from the compulsory annuity I mentioned before is deemed to be normal income and will be added to any other income he may be receiving and be subject to normal income tax.

If your uncle chooses to place all or part of his pension fund into a compulsory annuity, there are many different types of options, benefits and underlying investments to choose from. This can get a little complicated and understandably this is a big decision. It is important that he meet with a financial planning professional to ensure that he understands the choices available and how this will impact on his own personal circumstances for the sake of his financial security.

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Or, what often happens, the “pension fund” is actually a provident fund, in which case, for the time being, he can cash in more than a third, up to everything, even on retirement…

This answer is completely wrong!

1. When you ‘retire’ from a pension fund, you do NOT have the option to transfer to a preservation fund.
2. As long as you are below the retirement age stipulated in the fund rules, you can choose to withdraw from the pension fund (rather than ‘retire’). Early retirement from work does not mean you have to ‘retire’ from your pension fund. You could just as well also have resigned from your employer.

‘Withdrawal’ will entitle you to claim the full amount as a cash lump, albeit subject to ‘withdrawal’ lump sum tax. But you also have the option to transfer tax free to a preservation fund instead. As noted above, this is not ideal if you need to draw a regular income from this money.

Question I have been observing pension funds for Alexander Forbes, if one is unhappy with the rate your pension grows who can one approach to investigate, I mean I am talking in 1 year there was no growth amounts drop in 3 months with R90 000 rand at one shot. What rights does an employee have on choosing where you pension is invested and with which companies. Since Steinhoff’s exposure, the pensions are now droping at R20 000 in 2 weeks time. Who can provide input to this ?? How can one ever think of retiring if there is no growth in pension funds.

End of comments.





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