The South African retirement industry boasts an impressive array of investment vehicles for investors to choose from and, while choice is an imperative, it can make the environment difficult to navigate. There are four main types of retirement funds available to investors which include pension funds, provident funds, retirement annuities and preservation funds, and a solid understanding of these four vehicles is essentially when setting out on one’s investment journey. All retirement funds are required to be registered with the Registrar of Pension Funds and are governed by the Pension Funds Act, making this industry one of the most highly regulated in SA. In order for members to quality for various tax concessions, retirement funds must also be approved by SARS. Let’s unpack these four types of retirement funds:
A pension fund is normally offered as a condition of employment. When joining a company, employees are usually compelled to join the company’s pension fund towards which they will contribute on a monthly basis. In many instances, the employer makes contributions to an employee’s pension fund on their behalf. In addition, employees may be offered the option of increasing their level of monthly investment premium, up to a certain limit. SARS and our government have put excellent incentives in place to encourage South Africans to save for their retirement as opposed to relying on state grants. With effect 1 March 2016, investors are able to contribute up to 27.5% of their taxable income to towards a pension fund, provident or retirement annuity (or a combination of the three), up to a maximum of R350 000 per year. This is a significant benefit as it effectively allows investors to save with pre-tax money. When submitting one’s annual tax returns, investors will be required to submit proof of their pension fund premiums, and SARS will refund in accordance with one’s tax rate.
Pension fund rules permit investors to retire from the fund from age 55 onwards. At retirement, investors will have the option to withdraw one-third of their capital and to use the remaining two-thirds to purchase a pension income. Alternatively, investors can use the full capital to purchase an income. This decision would depend on the cashflow needs of the retiree, and whether there is any debt at retirement that needs to be settled.
As with a pension fund, a provident fund is normally offered as a condition of employment. Upon joining a company, an employee will be required to contribute a portion of their income on a monthly basis towards the company’s provident fund. In terms of tax deductions, provident fund members are provided exactly the same tax benefits as pension fund and RA members, and are able to claims tax deductions of up to 27.5% of their taxable incomes subject to the R350 000 annual limit.
In an effort to curtail the amount of full withdrawals at retirement, the rules regarding provident fund withdrawals were amended with effect March 2016. When retiring from a provident fund, from age 55 onwards, investors are permitted to withdraw the total funds invested in the provident fund before 1 March 2016. However, investors will only be permitted to withdraw one-third of any capital invested after 1 March 2016, with the remaining two-thirds required to be used to purchase an annuity income. As in the case of pension funds and retirement annuities, investors will not be permitted to withdraw from their provident fund before age 55.
When a person leaves their employment through resignation, dismissal or retrenchment, they have the option to withdraw the full amount of their accumulated funds and will be taxed accordingly. However, withdrawal is not advisable and investors are encouraged to transfer their accumulated funds into a preservation fund. This vehicle is designed to preserve one’s capital until retirement at age 55 or later to ensure that one is provided for in retirement. As investors would have already received a tax deduction on these funds, there are no further tax advantages provided when setting up a preservation fund. One attractive aspect of a preservation fund is that investors are permitted to make one full or partial withdrawal from their preservation fund prior to retirement.
Where one’s employer does not make provision for a pension or provident fund, or where a person is self-employed, a retirement annuity provides an excellent vehicle for retirement investing. Investors can choose to either invest through an insurance-based or unit trust-based retirement annuities, with the later being preferable as they provide greater investor flexibility, more transparent fee structures and do not penalise investors for termination or premium holidays. The tax deductions available to investors are the same as for pension funds and provident funds, allowing you to invest up to 27.5% of your taxable income towards your retirement annuity up to a maximum of R350 000 per year. Retirement annuities prohibit investors from accessing their capital before age 55. At retirement at 55 or later, investors are faced with the same withdrawal options as pension fund members.
The level at which an investor needs to save towards his retirement fund depends on multiple factors including the investment timeline, the individual’s retirement goals, his tolerance for risk, life expectancy and the age at which he intends to retire, amongst many other considerations. The optimal structuring of one’s investment portfolio is essential to ensure that one’s retirement goals are tax-efficient, cost-effective and attainable over the given time period and, as always, we recommend that investors seek independent retirement advice.
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