01 Sep What You Need To Know About Your Pension

Things you need to know about your pension

Saving for retirement has been a hot topic in South Africa of late for various reasons. With many people considering emigration, average South Africans who have paid little mind to their retirement savings before are now calculating costs and making enquiries with brokers to determine affordability of relocation. 

Furthermore, with the government coffers at an all time low and SOEs all but ‘maxed out’ their ‘credit’, the ANC government’s announcement that it is considering using pension funds to foot their bill has many South Africans worried.

What are the different retirement products?

In South Africa the main retirement products are pension funds, provident funds, preservation funds and retirement annuities. Though some discerned individuals invest in additional savings funds, for the sake of this article we will only discuss the above-mentioned funds.

Both pension and provident funds are savings funds where both an employer and employee make monthly contributions to a retirement scheme. The scheme (or fund) is managed by a fund administrator who is appointed by the fund trustees. An investment manager is tasked with investing the fund in different stocks, bonds and currencies. Though employees sometimes get to choose the type of investments or risk, the choices are usually limited.

As of March 2019, companies are required to automatically invest the pension or provident fund contributions in a default portfolio. This does not require opt-in from the employee, although employees can opt out and subsequently choose a different portfolio or their pension contributions. The new amendments introduced this year also allow for these savings to be preserved within the fund itself (as a paid-up member) when an employee leaves their position at a company. Previously, funds had to be transferred to other preservation funds, a pension funds at a new company or withdrawn.

When you withdraw from a pension or provident fund before retirement, you can invest those funds in a preservation fund or retirement annuity without paying withdrawal tax.

A preservation fund’s sole purpose is the preservation of pensions and provident funds. Subsequently, though you can invest your entire pension or provident fund in a preservation fund, the fund does not accept additional contributions from other sources.

A retirement annuity is a savings fund where contributions are independent of employers and initiated by the individual, though employers may opt to supplement an employee’s annuity. These annuities usually require a minimum monthly contribution to be made, but unlike pensions and provident funds, there i not a maximum annual ‘deduction’ (contribution). Depending on the fund manager, an individual may have more input in where their funds are invested than other retirement funds.

How can you withdraw your savings?

There are two ways to access your retirement funds — the one is a withdrawal and the other is retirement.

Pensions and preservation funds allow for withdrawal from the fund before retirement, but SARS imposes higher tax on early withdrawal than it does on retirement.

The table below shows how tax is levied on early withdrawal from a pension or provident fund:

This table is also used to calculate the tax on preservation fund withdrawal, but be reminded that you’re only allowed one partial or full withdrawal from a preservation fund before retirement. The remaining funds will only be available to you on retirement.

For all retirement funds across the board (pension, provident, preservation, RA), you will receive a third of your pension value as a lump sum on retirement, while the remainder will need to be invested in a guaranteed (life) or living annuity which will pay out your monthly pension.  Should your fund value be less than R247 500, you will be allowed to take it as a lump sum.

Provident funds historically allowed members to encash their total retirement savings at retirement, but the law was amended a few years ago to streamline the treatment and rules of all retirement funds.

The table below shows the taxation of funds on retirement:

Retirement annuities are a bit more restrictive when it comes to withdrawal. The maximum allowable amount which can be withdrawn from an RA before retirement is R7 000, and the remainder will only be available on retirement, subject to the same rules as the other funds.

What happens when I emigrate?

Emigration changes the rules a bit. Individuals who emigrate before retirement are allowed to encash their retirement savings and transfer the funds abroad.

Pension, provident and preservation funds allow for withdrawal and transfer of funds without restrictions, subject to withdrawal tax. The funds can be transferred by using the single discretionary allowance (up to R1 million per year) or foreign capital allowance (up to R10 million per year).

Retirement annuities, however, can only be transferred through financial emigration.

Once your funds are withdrawn, you can choose to use the money in any way you prefer, though many people choose to reinvest their savings in a local pension scheme.

Unfortunately, these rules don’t apply once you have retired. Although you are allowed to transfer your ⅓ lump sum abroad, funds in a guaranteed annuity cannot be commuted at all, while funds in a living annuity can only be commuted under if the value of the annuity is less than R75 000 (or R50 000 if a lump sum withdrawal had previously been made).

What is the current risk of keeping my pension in SA?

There are a few reasons why you may want to withdraw your retirement savings and reinvest abroad. Firstly, given the state of South Africa’s economy, you could earn higher returns on your investment if you invest your money elsewhere. Though retirement funds do theoretically allow for offshore investment, individuals have limited control over the portfolios and how the investments are managed.

If you’ve already emigrated, it also makes a whole lot more sense to utilise some of the local pension incentives (if available) by reinvesting your funds in a local pension. Such incentives offer tremendous growth and can more than negate the dent caused by withdrawal tax.

Another major scare for South Africans is the leading party’s intent to introduce prescribed assets on funds. Prescribed assets would dictate how and where financial institutions and investment managers invest money — most specifically money from pension funds. 

Such a move would not only be restrictive, but it also poses a major risk, given where the money will be invested — failing SOEs. Given that the principal aim of retirement funds is to offer persistent and stable growth on an investment in order to provide for individuals after retirement, it would be counterintuitive to invest in enterprises which are not only shown to be corrupt, but can offer practically no investment growth. One must imagine how much of SA’s pension contributions it would take to even get an enterprise like Eskom to a place where it is debt-free, let alone a state of profitability and growth.

Then if we also consider how much of our pension contributions are invested in JSE stock which has taken an enormous pounding this year, the matter becomes even more gloomy.

At the end of the day, if we tally the events of 2019 thus far, there does not seem to be any silver lining for South Africans — and if they come after your money, it will be even harder to leave the country in future.

If you are considering emigration or need assistance with transferring your retirement savings abroad, leave your details below and we’ll contact you to discuss your options.