Preserving your retirement savings in a Retirement Annuity
If you leave or lose your job, you can transfer your retirement savings from an employer-sponsored fund to a
Retirement Annuity (RA).
If you leave an employer-sponsored pension or provident fund, you may have a number of choices. These are:
- You can take the cash, which will be taxed at your average rate of tax, and the first R1 800 will be tax-free. The average rate used will be the higher of the average rate in the tax year in which you leave your employer or the average rate in the year before your departure.
- If the rules of the fund permit, you can leave your retirement savings where they are and become what is known as a deferred pensioner. You will use the money to buy a pension when you retire, but neither you nor your previous employer will be able to make further contributions to your savings. You will, however, receive growth on your investment. There are no tax or cost consequences to deferring your pension. You will not be able to access the money until the date of normal retirement.
- If the rules of the fund permit, you can transfer your accumulated retirement savings to a fund sponsored by your new employer. There will be no tax or cost implications to transferring your savings. You need to check whether your years of membership of the previous fund will also count with the new fund.
You can "warehouse" your retirement savings in a retirement product sold by a financial services company. You have a choice between a preservation fund or an RA fund. No tax is payable on the transfer (trans-location) of your savings to a preservation fund or an RA. However, you will incur investment costs, which can be as high as six or seven percent of your initial investment, and up to 2.5 percent a year thereafter, which is likely higher than the ongoing costs.
Before you choose either an RA or a preservation fund, you must understand the differences between the two. They are as follows:
When you transfer your retirement savings to a preservation fund, you need to be aware that different circumstances dictate when you will be able to withdraw your savings from the preservation fund.
If you are unemployed, your retirement date is that of the pension or provident fund you left. If you join another pension or provident fund, the retirement age of that fund will apply. If you are employed, but you have not joined another pension or provident fund, the rules of the preservation fund will apply. In this case, you will normally be given a choice of retiring between the ages of 55 and 69.
If you transfer your retirement savings to an RA fund, the rules of the pension or provident fund you left do not determine when you can withdraw your benefits. You can withdraw them anytime between the age of 55 and 69.
If you want to transfer your retirement savings to a preservation fund, your previous employer must be a "participating employer" before you make an application to join a preservation fund. This is an administrative requirement of SARS, and is met by your employer signing a declaration.
You do not need to involve your previous employer if you want to transfer your savings to an RA fund.
In most cases, you can make additional contributions to an RA fund.
You cannot make additional contributions to a preservation fund, apart from adding lump sums from your employer-sponsored fund.
With a preservation fund, the length of your contributory membership of the initial retirement fund is the main factor that determines the tax-free portion of any lump sum that you commute at retirement.
With an RA, only the years of membership of the RA will be taken into account in calculating the tax-free portion of a lump sum. In other words, your years of membership of the original pension or provident fund will not be taken into account.
There are both pension preservation funds and provident preservation funds. If you were a member of a provident fund, you must transfer your savings to a provident preservation fund. If you were a member of a pension fund, you must transfer your savings to a pension preservation fund.
If you were a member of a provident fund, you should not transfer your savings to an RA, because those savings consist of after-tax money that would be taxed again at retirement. You should transfer your savings to a provident preservation fund so that you will not face double taxation.
You are permitted to make one withdrawal from a preservation fund before retirement. That withdrawal may only take place after you have transferred your retirement capital to the preservation fund. Any deduction by your employer from the amount you transfer to a preservation fund - for example, to repay a loan, cover losses or to fulfil a maintenance or divorce order - counts as the one withdrawal from the fund. Once you have transferred your savings to an RA, you are not permitted to make any withdrawals before the age of 55.
When you withdraw your savings from a retirement fund, you are allowed to place a portion of the money in a preservation fund and a portion in an RA. The transfer of benefits is not taxed. The portion transferred to the RA is not regarded as the single withdrawal you are permitted from a preservation fund.
In some cases, if you are dissatisfied with your RA fund - say, the administration, costs or something else - you can transfer your savings to another RA, tax-free.
However, Gordon says, the rules of your fund must allow you to transfer your money to another fund. Most RA funds only permit transfers after you have turned 55.
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