Saving for retirement generally takes decades to achieve and invariably culminates in a point at which you are required to make a number of critical decisions in a relatively short space of time. These decisions can be multi-faceted and far-reaching – and getting them right the first time is essential. Here we explore the most common decisions retirees are faced with together with some factors to consider in the decision-making process.
Retiring from work
While there is no legislated retirement age in South Africa, keep in mind that many employers have a pre-determined retirement age at which point employees are required to retire from the company. Where the employer sponsors a retirement fund, such as a pension fund, the formal retirement age of the fund is usually synchronised with the company’s retirement age for the sake of expedience. However, formal retirement from the company does not necessarily mean that you need to retire from your pension fund, and it is important that you understand the options available to you (see below). Further, your employer may wish to retain your services in form of part-time employment or contract work which means that, while you may need to formally retire from the company, you could be in a position to continue generating an income. If you are self-employed or your employer has no formal retirement age, you will naturally have the option to continue working and generating an income for as long as you like or are able to. Whether or not you choose to stop working will depend on a number of factors such as whether you are sufficiently invested for retirement, your health, and your objectives for retirement, amongst other things.
Retiring from your fund
Another important decision you need to make is when to retire from your fund. As mentioned above, formal retirement from your employment does not mean that you have to retire from the fund. Here we unpack your options should you (i) choose to delay retirement or (ii) elect to retire from your fund.
(i) Delaying retirement
If you are invested in a retirement annuity, the earliest age of retirement is age 55, following which you are free to retire at any stage depending on your circumstances. If you are a member of your employer’s retirement fund, you are no longer compelled to retire from the fund when you retire from employment. Generally speaking, you have the following options available to you:
- Deferred benefit: You can leave your money in your employer’s fund as a deferred benefit until you are ready to start drawing from your investment, although there are a number of factors to be cognizant of. Firstly, if you elect to defer your benefits, keep in mind that you will not be able to make any additional contributions towards the fund and your group risk cover will fall away. Further, your funds may need to remain in their current investment strategy or alternative funds which the pension fund provider makes available. Note you will continue to be charged investment management fees and administration costs – although as part of a group retirement fund, it is likely that you will benefit from favourable institutional fees.
- Preservation Fund: Another option is to transfer your retirement fund benefits into a preservation fund which is effectively a holding bay for your money until you are ready to start drawing down from your investment but, again, there are a few factors that should be noted before proceeding. Firstly, the once-off withdrawal option that is available pre-retirement, remains available to you where you are effectively delaying your retirement however be aware of the taxation of such a withdrawal. Further, the rules of provident preservation funds, specifically in respect of investment contributions made before 1 March 2021, are different from those of pension preservation funds, so be sure to understand how you will be affected when you make withdrawal decisions on retirement. A transfer to a preservation fund is tax-free and preservation funds are transferrable to another active pension and or provident fund providing they comply with the rules of the new fund.
- Retirement Annuity: Transferring your funds into a retirement annuity is another option available to you, remember that this option will allow you to continue contributing towards your investment. That said, keep in mind that if you transfer funds from a provident fund to an RA, your vested rights – being those contributions made specifically towards a provident fund before 1 March 2021 – will be lost and this, in turn, will limit your lump sum withdrawal options at retirement to one-third of the fund value. In addition, a retirement annuity currently does not allow any access to the funds before the minimum retirement age of 55 except in specific circumstances.
(ii) Retiring from your fund
When choosing to retire from a fund, the options available to you will depend largely on the type of fund you are invested in and when those investments were made, particularly in the case of provident funds. As a general rule, where your fund has a value of less than R247 500, you can withdraw the full amount on retirement keeping in mind that the first R500 000 lump sum retired from a retirement fund is free from tax. This means that if you have never previously withdrawn from a retirement fund or taken a retrenchment benefit, you will be able to access R500 000 tax-free at retirement. To the extent that you have previously withdrawn or taken a retrenchment benefit will reduce your tax-free amount accordingly. That said, it is important to understand the withdrawal rules pertaining to the various retirement funds. In summary:
- Retirement annuities: When you retire from a retirement annuity, which is permitted any time from age 55 onwards, you have the option of commuting one-third of the fund value while you are required to use the remaining two-thirds to purchase an annuity income. You may choose to use up to the full amount to purchase an annuity income.
- Pension funds: The date at which you can retire from your pension fund will be stipulated in the fund rules. At retirement, you once again have the option of taking one-third in cash while using the balance to purchase an annuity income, or to use the full amount to purchase an annuity.
- Provident funds: The recent retirement fund harmonisation process, which aimed to streamline the treatment of retirement funds, came into effect on 1 March 2021 and it is important to understand how this affects your options on retirement. If you were age 55 or older on 1 March 2021, you have the option to withdraw 100% of your investment at retirement regardless of when your contributions to the fund were made provided you remained with the same provident fund up to your retirement. If you were 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 then R247 500, in which case you can withdraw the full amount.
While the tax implications of making a cash withdrawal should be considered, this is not the only factor to be taken into account. Other considerations are whether you have debt, whether you anticipate any large capital outflows in retirement such as overseas travel, vehicle purchases or home renovations, as well as your future cashflow needs. Remember, any cash withdrawn will form part of your deceased estate and will be dutiable in the event of your death, meaning that the effects of any cash withdrawal should also be considered in from an estate planning perspective.
Your annuity income
Once you have decided how much to withdraw on retirement, legislation requires that you use the balance to purchase either a life annuity, living annuity or a combination of the two. A life annuity is an insurance policy which effectively guarantees you a pension income for the rest of your life. In taking out this policy, all investment and longevity risk is transferred to the insurance company, and you have the option to link your policy to inflation so that the value of your annuity income does not lose value over time. A life annuity ceases to exist either on your death or on the death of the second-dying spouse. The other option is to purchase an investment-linked annuity known as a living annuity. A living annuity is not an insurance policy but rather an investment in your own name where you assume all investment and longevity risk. You have the option to draw down annually from your living annuity between 2.5% and 17.5% of the value of the fund and have full flexibility in terms of portfolio selection and design. You can adjust your draw down levels annually on the anniversary of the policy in accordance with your cashflow needs, and can choose to receive your income monthly, quarterly or annually. This type of annuity has significant estate planning advantages in that the funds held in a living annuity do not form part of your deceased estate and do not attract estate duty. A third option is to consider a hybrid annuity which is part life annuity and part living annuity, although it is always advisable that you seek expert advice when making such decisions.
Have a wonderful day.