Retiring from employment or occupation generally marks a shift from saving towards your retirement funds to drawing down from those investments. However, the process is seldom a simple one and invariably involves a set of carefully considered steps, the sequence of which is fairly important to the overall success of your retirement plan. Let’s explore.
Firstly, the process of formally retiring from your retirement funds should be approached strategically, with the type of fund you are invested in being an important factor in the decision-making process. If you are a member of an occupational retirement fund such as a provident or pension fund, the fund rules will stipulate the age at which you must retire from the fund. On the other hand, if you are invested in a retirement annuity or preservation fund, you can choose to retire any time from age 55 onwards with no upper age limit.
(i) Retiring from a retirement annuity
With the earliest retirement age being 55, retirement annuity investors are free to formally retire from the fund at any time with no maximum age limit. However, given the important role that a retirement annuity plays in one’s overall portfolio, it is advisable to be tactical in one’s approach to retirement. With retirement annuities being highly flexible investment structures, you have the option of keeping your funds housed in an RA structure without making further contributions towards it, which may be an option if you want to delay drawing down from your investment. Remember, when retiring from an RA, you have the option of commuting a maximum of one-third of the fund value and using the remaining two-thirds to purchase an annuity income from which you must draw a retirement income, although keep in mind the tax implications when making a cash withdrawal. This is because, while the first R550 000 withdrawn from a retirement fund on retirement is tax-free, any more than this is taxed as per the retirement lump sum tax tables. Individuals often tend to forget that the retirement lump sum tax tables are aggregated per individual and not applied to each separate fund you retire from. This means that once you have previously taken a cash commutation from a retirement fund, or if you are commuting many funds all at once, careful consideration will need to be taken on the tax you might be liable for. When deciding whether or not to retire from your RA, consider the following:
- The impact of Regulation 28 on your asset allocation, portfolio diversification, and investment returns bearing in mind that this piece of legislation limits, amongst other things, the offshore exposure that you can build into your portfolio.
- Whether or not you need to make a lump sum cash withdrawal to assist with large capital outflows and/or liquidity in retirement such as vehicle upgrades, wedding costs, overseas travel, or home renovations.
- Depending on the value of the withdrawal and whether you have made previous withdrawals from a retirement fund, the tax implications of such withdrawal.
- Your tax threshold in the current tax year and the impact on any annuity income you plan to withdraw in the current year.
- The impact of S37C of the Pension Funds Act on your estate plan should you elect not to retire from your retirement, keeping in mind that the distribution of retirement fund death benefits remains at the discretion of the fund trustees.
(ii) Retiring from a pension fund
If you are a member of an occupational pension fund, the formal retirement date will be stipulated in the fund rules. As in the case of retirement annuities, you have the option of taking one-third in cash while using the balance to purchase an annuity income – or using the full amount to purchase an annuity. That said, if you are not ready (for whatever reason) to start drawing down from your retirement nest egg, you have the option of deferring your pension benefit by leaving the money invested in your employer’s fund. If you elect to defer your pension benefits, note that you will not be able to make any additional contributions to the fund after you formally retire and any group risk cover attached to the fund will fall away. In addition, keep in mind that you will need to remain in the current investment strategy or alternative strategies that the pension fund provider makes available. If you are not ready to start drawing down from your retirement funds but don’t wish to defer your pension benefit, you may want to consider transferring the funds on a tax-neutral basis to either a retirement annuity or a preservation fund, depending on your specific circumstances. If you intend to retire from the fund and begin drawing down from your investments, keep in mind that your options are essentially the same as when retiring from a retirement annuity in that you have the option to commute one-third of the fund value as cash (which is taxable), or use the full fund value to purchase a pension income for your retirement years. When contemplating retirement from a pension fund, consider the following:
- When retiring from an occupational fund, your group risk cover falls away and it is important to understand how this impacts your portfolio.
- While deferment is an option, be sure to consider how this will impact your ability to structure an investment portfolio that is tailor-made to your needs.
- If you elect to transfer your funds into a preservation fund, keep in mind that you will not be permitted to make any additional contributions towards the investment. On the other hand, if you transfer the funds into a retirement annuity structure, you can set up a regular debit order for additional contributions to be made toward the fund.
(iii) Retiring from a provident fund
While recent retirement fund harmonisation legislation, which came into effect on 1 March 2021, aims to streamline the treatment of retirement funds going forward, there are a number of legacy complexities that provident fund investors should be aware of. In essence, from 1 March 2021 onwards, provident funds will be subject to the same rules at retirement as pension funds and retirement annuities, except where a provident fund member was age 55 or older on 1 March 2021 and remains a member of the same provident fund. In such circumstances, the provident fund member has the option to withdraw 100% of their investment when retiring from the fund. If the investor was under the age of 55 on 1 March 2021, any contributions made before this date will be vested and, at retirement, you can withdraw up to the full amount. Any contributions which accrued to the fund after 1 March 2021 will not be vested and, at retirement, you will only be able to withdraw one-third of the value of the non-vested benefits as a cash lump sum. The only exception to this is where your fund value is less than R247 500 in which case you can withdraw the full amount. For existing provident fund members, all accumulated member interests plus any future growth on those benefits as at 28 February 2021 will be given ‘vested rights’ and will not be impacted by these legislative changes. This means that, at retirement, a member will still be entitled to commute up to 100% of these ‘vested benefits’. Factors to consider when retiring from your provident fund include:
- If you were over the age of 55 on 1 March 2021 and belong to the same provident fund, you have the option to withdraw the full value of your fund, although it is important to first understand the tax implications of doing so. If necessary, you can request a tax simulation from your provident fund service provider.
- If you were under the age of 55 on 1 March 2021, you will only be able to withdraw the full value of your vested benefits. Any non-vested benefits will be subject to the same one-third, two-thirds rule as in the case of pension and retirement annuity funds.
- Again, understanding your cashflow needs is important when making decisions about commuting a portion of your investment as cash.
(iv) Retiring from a preservation fund
As in the case of retirement annuities, you are permitted to retire from a preservation fund any time from age 55 onwards although, once again, your decision to retire should form part of your overall retirement plan. When retiring from a pension preservation fund, you have the option of using the full amount to purchase a life or living annuity or withdrawing one-third of the fund value in cash. Remember, in the case of a provident preservation fund, you only have the option to withdraw all or part of the vested portion of your benefit as a lump sum while you are restricted to a maximum of one-third lump sum withdrawal in respect of your non-vested benefits. Once again, where the pre-tax value of your unvested portion is less than R247 500 at the date of retirement, you are permitted to access the full amount in cash subject to tax.
As is evident from the above, there are multiple factors to be considered when retiring from your various retirement funding investments including cashflow considerations, tax, previous withdrawals, the type of retirement fund, the impact of Regulation 28, and your capital needs after retirement, to name just a few. As such, avoid making retirement decisions in isolation but rather ensure that all decisions are made as part of a broader retirement strategy.
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