Question:
I am leaving my job end of the month and have a bit (about 140K) in my provident fund currently and going contracting. I'm looking at putting it into a low cost retirement annuity or Preservation Fund or Unit Trust (any other options?) and not to cash it in. What are the advantages/disadvantages of each one? I don't think I would want to withdraw any cash now but looking at a low cost investment vehicle where I don't get penalised (such as 10X or Sygnia RA). If I put transfer the money into a unit trust will I penalised at all or is it only if it goes into the preservation fund / retirement annuity that it is not penalised?
Answer:
Dee, If you take your money outside the retirement fund system (retirement annuities or preservation funds), you will pay tax on your withdrawal (18% on the amount above R25 000). So if you put your money in a unit trust, or in the bank or invest through a stock broker account, you will pay the withdrawal lump sum tax and you will pay tax on your investment income thereafter (capital gains tax, dividend withholding tax and tax on interest income) once you exceed the tax exempt limits. You will also pay higher fees, and most likely make poor investment decisions. And you cannot deduct further contributions for tax.
On the plus side, you can access your money whenever you want, although in the context of retirement saving, that is not a plus at all. The preservation fund is more flexible than a retirement annuity, as you are allowed one (full or partial) withdrawal before retirement (earliest age 55). With a provident preservation fund, you do not need to buy an annuity when you retire (iro the fund balance at 1 March 2015 and subsequent investment return thereon; contributions made to provident funds after 1 March 2015 are subject to annuitisation). But you cannot make contributions to a preservation fund. So if you want to keep saving further through a retirement fund, you need to take out a retirement annuity.
In a retirement annuity you can only access your money from age 55, and you then need to use two-thirds to buy an annuity (contributions/lump sum investments not claimed for tax are excluded from this requirement). Your annuity income is taxed per the income tax tables. With both the retirement annuity and the preservation fund, you do not pay tax on the investment income in the fund, you can deduct contributions (to the retirement annuity) and the tax-free portion of any lump sum at retirement (versus withdrawing now) increases from R25 000 to R500 000. You are correct to focus on low fees and to avoid plans that charge surrender penalties; you also need to ensure that your asset allocation is appropriate for your age and investment time horizon. For more on this please visit our financial education section.
