Question:
1. I have about R6.5m in a high cost pension preservation fund I want to transfer to either a low cost fund or a living annuity. I am 66 years old and retired. 2. Can I somehow transfer 50% of the fund to my wife without getting divorced? 3. How can I minimise the tax on the fund when I die while still retaining some flexibility. 4. What are the advantages and disadvantages of the preservation fund vs a living annuity. I do not need income at the moment. Please reply by e-mail as I am a bit deaf. Please inform me and get an order number if there are any costs involved in answering these questions Brian
Answer:
Brian, We are not authorised to give financial advice, and can therefore only explain your options to you. There are numerous permutations with different consequences, depending on what has gone before. A financial consult will be able to explain these to you in more detail.
In summary, these are your options: 1. You can transfer your present preservation fund to another (low cost) preservation fund free of tax. 2. You can reset your normal retirement age for the preservation fund to say 70, and then withdraw from the preservation fund. This will be taxed as a withdrawal lump sum, with the first R22 500 taxed at 0%, the balance to R600 000 at 18%, the balance to R900 000 at 27%, and the rest at 36%. 3. You are allowed one withdrawal from your preservation fund for each individual transfer from a pension fund into that preservation fund. 4. You can also transfer your pension preservation fund to a retirement annuity, resetting your normal retirement age to say 70. 5. You can cash in up to one third of your preservation fund; with the balance you must buy an annuity (either guaranteed or living). The one third lump sum will be taxed at favourable rates (first 315,000 at 0%, second R315 000 at 18%, third R315 000 at 27%, balance at 36%). Any transfer to a living annuity will not be taxed. Depending on your withdrawal history, you may be able to withdraw 50% or more out of the fund, pay the lump sum tax, and transfer the balance to your wife, free of donations tax. A living annuity permits flexibility and minimise tax.
The living annuity will enable you to choose your own portfolio, and it will also allow you to choose how much you wish to withdraw every year. Presently, the minimum is 2.5% pa, but under proposed legislation (which will also change the name of living annuities to RIDDA’s [retirement income draw-down account], the minimum will be 0%. It is expected that RIDDA’s will be included in a Bill to be released during this year.
If you do not draw down on your living annuity (as you do not need income at the moment), you will not pay tax on it until you do. On your death, the living annuity will typically not fall into your estate (unless no one claims it), but will go to your financial dependents and nominated beneficiaries. The living annuity will then only be taxed in the hands of the recipients (who can elect to receive the outstanding balance as a lump sum or as an annuity, or as a combination of the two).
Advantages and disadvantages: You cannot make annual withdrawals from a preservation fund, but if you do not need income for now then that does not matter. Traditional living annuities can be very expensive (transfer fee plus annual fee), and staying with a low-cost preservation fund would thus also be more advantageous. Tax consequences on your death are the same. A living annuity is probably more flexible, to invest the money as you wish.
