If you’re wondering whether it’s possible for you to transfer funds from a retirement annuity (RA) to a preservation fund, you’ll be pleased to know that we’ve got the answers you’re looking for right here. Let’s take a look at what these retirement savings vehicles are, and unpack the retirement annuity transfer rules, so you know exactly what you’re dealing with before you get started.
What is a retirement annuity?
You probably already know what this one is, given the nature of your question. However, for the purposes of creating a clear picture, a retirement annuity is a type of tax-efficient investment that makes it possible for you to invest up to 27.5% of your taxable income on a tax-free basis, capped at R350 000 per year. This type of investment vehicle is ideal if you’re not employed full-time, or you’re a business owner.
Except for a handful of circumstances (such as financial emigration or poor health) the funds in your retirement annuity are untouchable before you reach 55 years of age. Once you have reached retirement age your retirement annuity policy matures and it is now possible to withdraw one-third of your RA investment as a lump sum (hello, tax!), while the remaining two-thirds must be used to purchase an annuity that will see you through your retirement.
What is a preservation fund?
A preservation fund is intended to safeguard (“preserve”) the proceeds of a pension or provident fund in the event that you resign from employment, or you are retrenched or dismissed. If you are moving money from a pension fund, it needs to be transferred into a pension preservation fund, while you’ll need to put money from a provident fund into a provident preservation fund. If you are moving money into a preservation fund, it’s important to note that you can only transfer the full amount – in other words you cannot make a lump sum withdrawal before transfer.
Retirement annuity vs preservation fund: how do they compare?
As mentioned, a preservation fund is intended to help you preserve your withdrawal benefits (the benefit of having money to withdraw, which comes because you haven’t spent it!) until retirement age. There are four major differences when it comes to retirement annuities and preservation funds:
- Ongoing contributions: regular contributions are possible with a RA, while you cannot contribute into a preservation fund. A preservation fund is purely for transferring money from other funds.
- Withdrawal benefits: Before retirement you cannot withdraw your money from an RA (unless you financially emigrate), while you can make full or partial withdrawal from your preservation fund before retirement.
- Retirement benefits: Once you’ve blown out 55 birthday candles, you can choose to receive your entire fund balance as cash from your provident preservation fund but you can only get one third as cash from a retirement annuity or pension preservation fund and you will be obliged to use the remainder to purchase an annuity.
- Difference in costs: the cost of investing with a preservation fund is generally lower than that of a retirement annuity.
What is a Section 14 transfer when it comes to retirement annuities?
Given that you cannot transfer your retirement annuity to a preservation fund, (you can only transfer to a preservation fund from a pension or provident fund) – what can you do with your retirement annuity? It is possible to transfer your retirement annuity to another retirement annuity fund. According to the Pension Funds Act, this is known as a Section 14 transfer and if carried out in accordance with retirement annuity transfer rules, it’s a tax-free move for you. However, it takes several months to complete and may attract penalty fees for early termination of your retirement annuity with your initial provider.
FinGlobal: financial experts for expats
Still confused about transfers and retirement annuities and pension, provident and preservation funds? Throw in living and life annuities into the mix, and things soon get complicated – because everything sounds so similar, and retirement annuity rules can get tricky. That’s where our financial planning experts come in. We’re ready to answer all your burning questions, and we’ve got all the in-house expertise you need to help you make your next big move to secure your financial future, including:
- Financial emigration
- Tax refunds
- Tax clearance
- Tax emigration
- Retirement annuity encashment
- International transfers
- Exchange control
- Pension fund transfers
- Withdrawing your pension, provident or preservation funds
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