Question:
I am due to retire on my 60th Birthday. My provident fund specifies that I must take my benefit at age 60. However, I can request for my current employer to have me stay on until the age of 65. Can I request my provident fund to extend my retirement date until age 65, or must I buy a retirement annuity and invest the remaining five years into something else?
Answer:
Casper,
This may depend on your fund's specific rules, but legally it is allowed that you stay in your employer's retirement fund if you take late retirement. Your risk benefits would however cease once you pass your defined "normal retirement age".
If you are forced to retire at age 60, you will not be able to defer your tax liability on this money, unless you purchase a post-retirement annuity (living or guaranteed). If you bought a pre-retirement retirement annuity, this would have to be with the after-tax proceeds of your provident fund. The retirement annuity would stop you tapping your retirement savings while you are still working and would allow you to earn tax-free investment income for another five years. Also, your (after-tax) lump sum transfer would be excluded from the annuitisation requirement when you do retire, and as you will be allowed to take one-third of your total retirement annuity fund balance as a cash lump sum, you will most likely be able to take the entire retirement annuity balance as cash after five years. So you would keep that flexibility.
But you will pay more lump sum tax on this investment growth (net of your transfer) in the retirement annuity. possibly at 36%. This is significantly higher than the tax rate you pay on dividends (15% withholding), capital gains (25% taxed at your marginal rate ie no more than 13.3%) and interest (taxed at your marginal rate but with a R22 800 annual exemption). So it would probably pay you to invest this money on your own. (It would be a different calculation if you could transfer your entire pre-tax benefit, as you would be earning a return on a much bigger base).
Note though that once you have claimed your provident fund as cash, you cannot use the after-tax proceeds to buy a living annuity. To keep your options open and maximise your tax advantage, you would definitely be best served by staying in your current provident fund until you do retire for good.
