Retirement Funding Vehicles: Your Options and How They Work

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The tax advantages of investing in a pension fund structure are hard to ignore and, as such, formal retirement funds such as pension, provident, preservation and retirement annuity funds are attractive options. to save for retirement. The Taxation Laws Amendment Act, which aims to simplify the pension funding landscape, has successfully aligned these vehicles and their tax treatment. Following the harmonization process that took effect on March 1, 2021, it is now easier for investors to understand how to save for retirement and how each vehicle works.

Pension funds

Pension funds are generally offered as a condition of employment. By joining a company, employees may be required to join the company’s pension fund to which they will contribute monthly. Employees have the flexibility to choose at what level they wish to contribute and may have the option of increasing their monthly contribution, up to certain limits. Depending on the structure of the fund, the employer may contribute to the employee pension fund within the framework of the personnel provident fund.

As is the case with all pension funds, up to 27.5% of its taxable income can be invested in a pension fund structure on a tax deductible basis, subject to an annual limit of 350,000. rand. The pension fund is managed by a board of trustees whose responsibility is to manage the fund in accordance with the Pension Funds Act, the Income Tax Act and other related laws.

As part of their duties, the fund trustees are required to define the investment strategy, bearing in mind that they may offer various investment options to members. For example, they may decide to include a more conservative investment strategy for members approaching retirement, while offering a more aggressive strategy for members with longer investment horizons. As a pension fund, the funds are subject to Regulation 28 of the Pension Fund Act which aims to limit the investment risk to which pension funds are exposed.

When a participant leaves their job, they have the option of leaving their accumulated capital in the employer’s default investment strategy until retirement. They also have the option of transferring the funds in a tax neutral manner to a retirement annuity in their name or a preservation fund. Although not recommended in most cases, the member can choose to withdraw some or all of their funds which will be taxed according to the retirement withdrawal tables.

The earliest age at which a member can retire from a pension fund is 55, although the official retirement age is dictated by the rules of the scheme. Upon retirement, a participant has the option of withdrawing one-third of the value of the fund which will be subject to the pension fund tax tables. The remaining two-thirds should be used to purchase annuity income in the form of a life annuity, life annuity, or hybrid. If the member chooses not to withdraw a third party, they must use the full amount to purchase annuity income. Keep in mind that when the value of the fund on the date of retirement is less than R247,500, the member is able to withdraw the full amount, subject to tax.

Contingency fund

Like pension funds, a provident fund is normally offered as a condition of employment when a person joining a group of employers is required to contribute a portion of their income to the company’s provident fund on a monthly basis. The tax deductibility of provident fund premiums is fully aligned with contributions to the pension fund, meaning members can invest up to 27.5% of their taxable income in the fund and claim a tax deduction from Sars. In the event of termination of employment following a dismissal, resignation or dismissal, the member also has the possibility of withdrawing the entire sum accumulated in the fund, or of transferring all or part capital in a preservation fund or a retirement annuity. As is the case with pension funds, provident funds are managed by a board of directors which also has the function of choosing one or more suitable investment strategies for the members of the provident fund.

Prior to the implementation of the harmonization of pension funds on March 1, 2021, members who withdraw from a contingency fund had the option of making a full withdrawal of the fund without restriction on the use of funds. The rules for withdrawing provident funds have been changed to bring them into line with pension funds and retirement annuities. However, it is important to note that the existing rights of provident fund members have not been affected and that only funds invested after March 1, 2021 will be subject to this new regulation. In practice, this means that all the savings accumulated on February 28, 2021 will be subject to the old rules and that the 55-year-olds on March 1, 2021 will still have the possibility of fully withdrawing upon retirement, provided they remain in the same employer fund, including funds that have accumulated since. However, when a member leaves and joins a new provident fund, their new savings will be subject to the new rules and full withdrawal will not be an option for the funds accumulated in their new provident fund.

Members who are under 55 on March 1, 2021 will effectively have two separate retirement savings, the first being the funds accumulated until March 1, 2021 plus any future growth in investments (called grandfathered), and the second being those that accrued after March 1, 2021, including any investment growth. When the member withdraws from the provident fund, he has the possibility of making a full withdrawal in respect of his acquired rights, subject to tax. Unvested rights, i.e. those accumulated after March 1, 2021, will be subject to the same withdrawal rules as pension, custody and retirement annuity funds. As in the case of pension funds, where the value of the fund at retirement is less than R247,500, a full 100% may be taken at retirement, subject to tax.

Preservation Fund

Preservation funds are specifically designed to preserve accumulated capital intended for retirement and are an attractive option for people leaving their jobs through layoff, resignation or layoff. Although their withdrawal rules are aligned with pension funds and the new provident fund regulations, there are a number of features that make preservation funds unique.

When a person quits their job by resignation, dismissal or dismissal, they have the option of withdrawing the full amount of their accumulated funds and will be taxed accordingly. However, the first price is to keep the invested capital so as not to interrupt the process of capitalization and to protect the growth achieved on your investment. The Preservation Fund is designed precisely for this purpose and, being a retirement fund, is governed by the Pension Fund Act and the provisions of the Regulation 28.

When you leave your job before formal retirement, you have the option of preserving your accumulated capital by transferring it tax-free into a preservation fund. Once your money is in a preservation fund, you cannot make additional contributions to the fund unless the money comes from a registered retirement fund. Unlike pension and provident funds, investors are allowed to make a full or partial withdrawal from their preservation fund before the age of 55, with only the first 25,000 rand exempt from tax. At retirement, the withdrawal rules are the same as for pension funds and the new provident fund legislation. This means that investors can choose to redeem one-third of their accumulated capital subject to tax, with the remaining two-thirds being used to purchase annuity income.

Retirement pensions

When the employer does not provide a pension or provident fund, or when someone is self-employed, a retirement annuity is an excellent investment vehicle for retirement. Investors can choose to invest through an insurance-based or trust-based retirement annuity, the latter being preferred because it offers greater flexibility to investors, more transparent fee structures and does not penalize investors if they stop contributing.

The tax deductions available to investors are the same as for pension funds and provident funds, allowing you to invest up to 27.5% of your taxable income towards your retirement pension up to a maximum of R350 000 per year. Contributions to a mutual fund retirement annuity can be made monthly, quarterly, annually, or on an ad hoc basis, and investors can stop and restart their contributions as their circumstances change. Investors are free to choose an investment strategy that fully meets their needs, albeit within the limits of Regulation 28.

The flexibility and choice of investments offered to individual investors make retirement pensions particularly attractive. Keep in mind that retirement annuity funds are not accessible until age 55 and, unlike pension and provident funds where retirement age is regulated by plan rules, investors can formally opt out. fund at any time thereafter. However, the same one-third, two-thirds withdrawal options are available to retirement annuity investors at the time of formal retirement to ensure that the bulk of the funds are used to purchase retirement income.

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