In this article, we explore in more detail, the various types of retirement funds that are available to investors, as well as the rules that are applicable regarding withdrawals, early termination, and transfer.
Pension fund
Contributions
The contributions that an employee makes towards a pension fund are tax deductible up 27.5% of pensionable income, that is subject to an annual maximum of R350 000. It is often that employers make it compulsory for employees to join its pension fund. However, staff get the option of contributing a percentage of their salary (generally between 5% and 15% of taxable income).
Withdrawals/Early termination
Each pension fund has rules according to which retirement date of the fund is set. In the event of resignation and retrenchment, the investor has an option to withdraw the saved funds, and subject to tax. However, the general rule is that an investor may not access their capital prior to the fund’s retirement age, with an exception to a case of ill-health or disability.
Transfer
In the event of resignation from an employer, there is an option for the investor to transfer the pension fund interests or gains to a pension preservation fund, or to a retirement annuity. Additionally, if an investor is moving to a new employer, who has a pension fund in place, the pension fund interest or gains can be transferred to the new employer’s fund, if the fund rules make provision for this.
Retirement
When the age of the retirement fund is reached, one-third of the fund can be taken as a cash withdrawal, which is taxed according to the retirement tax tables. Thereafter, it is obligatory for the remainder two-thirds to be used to purchase a life or living annuity, to provide a regular income during the years of retirement. In addition, there are no tax implications when using pension interests or gains to purchase a living or life annuity, although the investor can be taxed on the annuity income.
Provident fund
Contributions
Like pension funds, the employee contributions are tax deductible up 27.5% of pensionable income, subject to an annual maximum of R350 000.
Withdrawals/Early termination
Like pension funds, investors are not permitted to make any withdrawals from the fund prior to the retirement age. However, in the event of retrenchment, there is an option of making a full withdrawal. Additionally, depending on the rules of the provident fund, an investor who is ill, disabled, and unable to work may apply for early retirement.
Transfer
Upon resignation or retrenchment from an employer, the transfer of the gains from a provident fund to a retirement annuity or a provident preservation fund can be made. Additionally, if moved to a new employer, who contributes to a pension fund, the transfer can be made to the fund without paying tax. Moreover, it is not possible to transfer from a provident fund into a pension preservation fund.
Retirement
As it currently stands, when retired from a provident fund, an investor can take full-lump sum withdrawal, subject to the retirement tax tables. However, it is government’s intention to align the benefits of provident fund to those of pension funds, although this legislation has been postponed until March 2021.
Preservation Fund
Contributions
As a preservation is pre-retirement vehicle designed to preserve the retirement benefits when an investor has left their employer’s pension or provident fund. In terms of legislation, only money from an approved retirement fund can be invested in a preservation fund which means that no other additional contributions can be made towards the fund.
Withdrawals/Early termination
Preservation fund investors can make one full or partial withdrawal from the fund before retirement, which is normally set at age 55, subject to the withdrawal tax tables. This is a distinct benefit of a preservation fund, especially for those who are a long way from retirement and who fear they may need access to their capital sooner.
Transfer
A preservation fund investor can choose to transfer his fund to a different preservation fund, with not tax being payable on the transfer. A preservation fund can also be transferred to a retirement annuity on a tax-free basis.
Retirement
Members of a preservation fund can retire from the fund after the age of 55, bearing in mind that the rules for pension preservation and provident preservation funds differ. If an investor retires from a pension preservation fund, they can take a one-third withdrawal subject to tax, and the remaining two-thirds must be used to purchase an annuity. If an investor retires from a provident preservation fund, they still have the option to make a full withdrawal although legislation is scheduled for March 2021 to align pension and provident preservation funds in this regard.
General
All retirement funds which fall within the ambit of the Pension Funds Act, which includes provident, pension, preservation, and retirement annuity funds, share some common attributes. For instance, assets housed in any approved retirement fund fall outside of one’s deceased estate and, as such, do not attract estate duty and are protected from one’s creditors.
Further, where the investor of an approved fund emigrates prior to normal retirement age, he is permitted to access the full amount in his retirement fund, subject to SARS approval. In all instances, retirement funds are governed by the fund rules which are enforced by the fund trustees. This means that the distribution of the funds in the event of death will be subject to the discretion of the trustees based on their determination as to who qualifies as the financial dependents.
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(Source: FA News, 2020)
