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Retirement Planning: Products

What is a Preservation Fund?

A Preservation Fund is a vehicle for the preservation of pension or provident benefits of employees who cease to be members of a pension or provident fund as a result of resignation, retrenchment or the winding up of such a fund.

Key Benefits

  • Only a single transfer may be made from an approved fund.
  • A key feature is the full disclosure of all costs.
  • A guaranteed fund can be selected as an added benefit to protect the investor against market fluctuations.
  • Payment is accepted in the form of withdrawal benefits from any approved funds, on a tax-free basis. This means that no tax is levied on any amount transferred, and has the same effect as a pre-tax investment.
  • The Investor may select from a wide range of local and offshore unit trust funds; money markets accounts, guarantee funds, wrap funds and structured funds. However, in terms of the Pension Funds Act, a minimum of 25% of a member's capital must be invested in a combination of gilt and income funds, and money market accounts. Alternatively he/she may invest 100% of his capital must be invested in a combination of gilt and income funds, and money market accounts. Alternatively he / she may invest 100% of his capital in a selection of managed prudential investments.
  • When markets are perceived to be expensive, the investor may phase the investments into an investment of his / her choice, by making use of a money market account.
  • At retirement, the normal options available to pensions or provident funds will apply Switches between different underlying funds at greatly reduced costs.
  • Any member is entitled to one withdrawal, either from his / her transferring fund or the preservation fund prior to retirement. It is possible to withdraw any amount, up to the full fund value. Under current legislation, the first R1 800 of the withdrawal will be tax-free, with the balance being taxed at the higher of the average rate of tax, in the year of withdrawal or the previous year.
  • The member selects his / her own retirement date at inception but this can be altered should circumstances change.

RETIREMENT

PENSION MONEY

The preservation fund will pay out a lump sum of up to one third (1/3) of the value of the fund account on the date of retirement. By law the member is compelled to utilise the balance of the fund to purchase an income (annuity) payable for the remainder of their lives.

PROVIDENT MONEY

The preservation fund can pay out the full value to the member on the date of retirement.

TAX

On retirement the member qualifies for certain benefit:

 

PROVIDENT FUND

PENSION FUND

RETIREMENT BENEFIT

 

 

No tax payable on lump sums for individuals with a taxable Income of R46 000 or less. (With effect from 1 March 2008)

Cash Lump Sum

Cash Lump Sum

Entire amount or surrender value of policy

1/3 of total value (if 2/3 of the total value of the annuity that is due upon retirement is less than R50,000, full benefit) Section 1 “pension fund” (c)(ii)(dd) Balance used to purchase a comp. annuity taxed i.t.o. tax tables.

Tax free portion

Tax free portion

Z = C + E – D (Formula B)
Where:
Z = tax free amount
C = R300 000 (this limit applies over the tax payers life time and is applicable in respect of all funds to which the taxpayer belongs).
E = previous disallowed own contributions, tax free transfers from public sector funds and divorce order amounts transferred from approved funds.
D = total previous tax free deductions allowed to the taxpayer in respect of paragraph 5 of the second schedule.
Second Schedule

Z = C + E – D (Formula B)
Where:
Z = tax free amount
C = R300 000 (this limit applies over the tax payers life time and is applicable in respect of all funds to which the taxpayer belongs).
E = previous disallowed own contributions, tax free transfers from public sector funds and divorce order amounts transferred from approved funds.
D = total previous tax free deductions allowed to the taxpayer in respect of paragraph 5 of the second schedule.
Second Schedule

Taxable portion

Taxable portion

Taxed as per table in item 7 of Appendix 1 to the Income Tax Act as follows:
The first R300 000 of the taxable amount at 18%
The next R300 000 of the taxable amount at 27% and
The balance of the taxable amount at 36%
Section 5(2)

Taxed as per table in item 7 of Appendix 1 to the Income Tax Act as follows:
The first R300 000 of the taxable amount at 18%
The next R300 000 of the taxable amount at 27% and
The balance of the taxable amount at 36%
Section 5(2)


PROVIDENT FUND
PENSION FUND
RETIREMENT BENEFIT


No tax payable on lump sums for individuals with a taxable Income of R46 000 or less. (With effect from 1 March 2008) Cash Lump Sum Cash Lump Sum
Entire amount or surrender value of policy 1/3 of total value (if 2/3 of the total value of the annuity that is due upon retirement is less than R50,000, full benefit) Section 1 “pension fund” (c)(ii)(dd) Balance used to purchase a comp. annuity taxed i.t.o. tax tables.
Tax free portion Tax free portion
Z = C + E – D (Formula B)

Where:
Z = tax free amount
C = R300 000 (this limit applies over the tax payers life time and is applicable in respect of all funds to which the taxpayer belongs).
E = previous disallowed own contributions, tax free transfers from public sector funds and divorce order amounts transferred from approved funds.
D = total previous tax free deductions allowed to the taxpayer in respect of paragraph 5 of the second schedule.
Second Schedule Z = C + E – D (Formula B)

Where:
Z = tax free amount
C = R300 000 (this limit applies over the tax payers life time and is applicable in respect of all funds to which the taxpayer belongs).
E = previous disallowed own contributions, tax free transfers from public sector funds and divorce order amounts transferred from approved funds.
D = total previous tax free deductions allowed to the taxpayer in respect of paragraph 5 of the second schedule.

Second Schedule
Taxable portion Taxable portion
Taxed as per table in item 7 of Appendix 1 to the Income Tax Act as follows:
The first R300 000 of the taxable amount at 18%
The next R300 000 of the taxable amount at 27% and
The balance of the taxable amount at 36%
Section 5(2) Taxed as per table in item 7 of Appendix 1 to the Income Tax Act as follows:
The first R300 000 of the taxable amount at 18%
The next R300 000 of the taxable amount at 27% and
The balance of the taxable amount at 36%
Section 5(2)

TAXATION OF THE FUND

In terms of the current legislation the fund itself is not taxed.

DEATH

In the event of a member pre-deceasing the selected retirement date, the market value of the deceased member's fund account, net of tax will be paid to dependants or nominated beneficiaries in terms of Section 37C of the Pension Funds Act. The Trustees of the fund have to exercise their discretion in order to ensure a) the correct people benefit, and b) those most in need receive as much as possible.

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What is a Living Annuity?

A Living Annuity is a post-retirement product providing an income for the life of the member.

It enables the member of a pension, provident or retirement fund to purchase an untied annuity (pension) on retirement. Current legislation requires a retiring member of a pension or retirement annuity fund to purchase a compulsory annuity with a minimum of two thirds (2/3) of his / her retirement capital. The member of a provident fund is also entitled to purchase an annuity if the rules of the fund specifically permit him / her to do so.

Key Benefits
• All charges and costs are disclosed. The Investor may select from a wide range of local offshore unit trust funds; money markets accounts guarantee funds, wrap funds and structured funds. However, in terms of the Pension Funds Act, a minimum of 25% of a member's capital must be invested in a combination of gilt and income funds, and money market accounts. Alternatively he / she may invest 100% of his capital in property, in a selection of managed prudential investments.
• The investor may switch between the various funds offered at any time, and normally at a greatly reduced.
• In times of uncertainty, the investor may choose to receive a full guaranteed income.
• The capital I protected in that the remaining balance of the Investment accrues to his / her estate or nominated beneficiaries, upon death.
• The investment cannot be attached on sequestration.
• The investor can benefit from Rand Cost averaging, by phasing his/her investment into the market over a period of time.
• Depending on his/her income requirements, the investor may currently select an income of between 2.5% and 17.5% of his/her investment value. The income can be paid monthly, quarterly, semi-annually or annually in arrears to a nominated bank account. The life annuity should never be exhausted during the annuitant's lifetime.
• The member can thus defer a potential liability for tax on the income earned until they need to draw the income. This would be useful if he / she still had other sources of income.
• The member can amend the income percentage annually on policy anniversary. He / she can thus adjust the income received to the circumstances at that time while attempting to grow the capital.

DEATH

On the death of the annuitant, the portfolio value may be paid out in the form of an accelerated annuity to the nominated beneficiaries over a period of five years. Alternatively, the deceased member's dependants may elect to have the annuity paid over their lifetime.

TAXATION

The annuity payments made to the annuitant are fully taxable in his/her hands, at his/her marginal tax rate. The portfolio will not be subject to tax.

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What is a Retirement Annuity?

A Retirement Annuity is an approved individual tax-efficient retirement plan.

Individuals, to supplement their company pension and provident funds often buy Retirement Annuities. However, it is also very useful for self-employed people who need to save for retirement in a tax-effective manner, who cannot be members of a traditional pension or provident fund.

Key Benefits

Both single and/or regular investments may be made.

The investor may switch between financial instruments or portfolios within the investment.

Contributions are tax-deductible up to the limits provided by the Income Tax Act.

A member may select his/her retirement date, which may be altered at a later stage, but with a minimum age of 55 years and a maximum of 69 years.

The investment cannot be attached on sequestration.

The investor may select from a wide range of local and offshore unit trust funds; money markets accounts, guarantee funds, wrap funds and structured funds. However, in terms of the Pension Funds Act, a minimum of 25% of a member's capital must be invested in a combination of gilt, and income funds, and money market accounts. Alternatively his/she may invest 100% of his/her capital in a selection of managed prudential investments.

Some Retirement Annuity funds can accept transfers from other approved pension, provident or retirement annuity funds, prior to the retirement date, on a tax-free basis.

TAXATION

DEDUCTIBILITY OF CONTRIBUTIONS

In any particular tax year, a member may claim a deduction from his/her taxable income which is the greater of:

15% of non-retirement funding income; (NRFI).

or

R3500 less allowable pension fund contributions

or

R1750

Plus

An additional amount of

R1800 deductible per annum - Section 11 (k) (ii) (aa) for arrear contributions

RETIREMENT BENEFITS

The Retirement Benefit will pay out a lump sum of up to one third (1/3) of the total value of the Retirement Annuity on the date of retirement. The balance must be used to buy a life annuity (pension).

Under current legislation the first R300 000 is tax free. The next R300 000 is taxed at 18%. The next R300 000 at 27% and the balance of the withdrawal amount up to one-third (?) of the total value is taxed at 34%. No member may retire before the age of 55 unless the member becomes permanently disabled.

TAXATION OF GROWTH

In terms of current legislation, the Retirement Annuity Fund will be taxed on all the interest and rental income at 25%. Although this will have the effect of reducing the overall growth, this is still lower than the taxation paid for natural persons in terms of the "Four Fund Approach" which is currently 30% p.a.

DEATH

If the member dies prior to reaching his/her selected retirement date, the dependants or nominees shall be entitled to receive a pension based on the member's total fund value. The dependants or nominees shall have the option of taking a commutation net of tax, with the balance being used to provide a compulsory purchase annuity

DISABILITY

If the member is disabled prior to retirement, the member is entitled to the same benefits and options if he/she had retired normally from the fund. The member will also qualify for the same tax relief offered to retiring members even though his / her age may be less than 55 years.

 

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