When you retire as a member of a pension fund, pension preservation fund, or retirement annuity fund and choose to take a lump payment, you can take (commute) a lump amount equivalent to one-third of your retirement interest in that fund. The remaining two-thirds of the money will be paid out as an annuity (a regular pension). You may, however, collect the full retirement interest as a lump amount if your total retirement interest in the fund does not exceed R247 500.
Currently, unless the terms of a provident fund or provident preservation fund provide for the payment of an annuity on a member’s retirement, your retirement interest is normally paid in a lump amount when you retire. If you are already retired and receiving annuity income via a living annuity plan, you may transfer the amount as a lump sum if the total value of the assets falls below R125 000 at any point.
After taking into account, for example, donations to a retirement fund that did not previously qualify for deduction or were not exempt from regular tax, tax will be computed on the gross retirement fund lump sum benefit. In layman’s terms, this indicates that an individual is entitled to a deduction for any retirement payments made. These donations, however, are limited in terms of taxation. If the deduction is limited, the amounts are carried forward to the next year of assessment and can be claimed as a deduction in that year. As a result of the limitation, amounts that are not claimed as a deduction in any year of assessment are compounded. When a person retires, for example, compounded or excess contributions that did not previously qualify for a deduction or were not exempt can be utilized to lower the gross lump sum number on which the tax is computed. An example will be given below to demonstrate this.
The lump sum benefit from the retirement fund for the 2020 tax year is taxed at special rates at retirement, as shown below:
It’s vital to remember that ALL lump amounts received from a retirement fund (and from an employer in the form of a severance payment), whether received as a result of retirement or not, are taxed on a cumulative basis. When the member eventually retires, the entire value of any lump sum benefits received after October 1, 2007, will be factored into the tax payable on the member’s current retirement fund lump sum benefit.
What is an retirement annuity?
- Retirement annuities provide a retiree with a lifetime of guaranteed monthly or annual income till their death.
- These annuities are frequently funded years in advance, either in a lump sum or over time through a series of recurring payments, and they can provide fixed or variable cash flows in the future.
- While annuities are known for their high upfront fees and early withdrawal penalties, which make them somewhat illiquid, they can be beneficial to those who require additional income in retirement.
What is the difference between a retirement annuity and a pension?
When you first started working for a firm, you were automatically enrolled in its retirement plan, which was usually either a pension or a provident fund. Many organizations, on the other hand, are transitioning to retirement annuities, which provide flexibility and choice to their employees, who are the ultimate owners of their own RAs. Some businesses also provide their employees with a pension or provident fund through an umbrella fund structure, which can save them money.
Pension funds, provident funds, and retirement annuities used to have very separate rules, but they are now much more coordinated. All three options allow you to deduct up to 27.5 percent of your total gross taxable income or 27.5 percent of your total gross salary from your contributions (subject to an annual ceiling of R350 000).
Members of these funds’ retirement options have also been aligned since March 1, 2021: Members can take up to one-third of their investment as cash when they retire. The remaining funds must be moved to a retirement income product, such as a living or guaranteed life annuity. A bigger percentage of their investment may be available in cash, but only if it is less than a certain amount set by law or if a portion of it has vested rights. When the legislation regulating provident funds changed, members were granted vested rights. Investments with vested rights can be moved between retirement accounts and taken as cash up to 100 percent at retirement.
The fundamental distinction between pension or provident funds and retirement annuities is that under a retirement annuity, the investor owns the investment outright and membership is not contingent on job status. In other words, even if they leave their employer, their investment and contributions will continue. When employees leave a company, they are frequently unable to continue paying to the pension or provident fund.
What is South African retirement annuity fund?
The South African Retirement Annuity Fund, which was established in 1961 and is sponsored and administered by Old Mutual, is a retirement annuity fund. As required by law, it is registered with the Financial Sector Conduct Authority (FSCA) and the South African Revenue Services (SARS).
Can you cash out a retirement annuity in South Africa?
If I understand you well, you intend to leave the nation permanently before December 2021 to live and work in another country. You have a retirement annuity and want to cash it in before turning 55 so you can take the money with you. You don’t say whether you’ve already completed the South African Reserve Bank’s formal/financial emigration process (Sarb). I’ll start by answering this part of your inquiry.
You couldn’t access your retirement annuity before March 1, 2021 unless you were 55 years old, the fund value was less than R7 000, you became physically disabled, or you went through the formal/financial emigration process with the Sarb.
Unless your application to the Reserve Bank was submitted on or before February 28, 2021, the Sarb financial/formal emigration process will end on March 1, 2021.
The rule currently specifies that anyone who seeks to collect their retirement pension must be 55 years old, the fund value must be less than R15 000, they must become permanently incapacitated, or they must have been a non-resident for South African tax purposes for three years on or after March 1, 2021. If you were a non-resident for tax purposes from March 1, 2018 to March 1, 2021, you will be eligible to take your retirement annuity as a lump sum withdrawal.
This final section represents a significant adjustment for anyone considering or who have already left the nation.
You must have been a non-resident for South African tax purposes for at least three years if you want to access your retirement annuity and the other rules do not apply to you. You may no longer follow the formal/financial emigration process with the Reserve Bank.
For example, if you decide to leave South Africa and relocate to Australia permanently, you should theoretically be entitled to terminate your South African tax residency on the day you depart. After that, you’d have to wait three years to receive your retirement annuity, at which point you’d be entitled to liquidate the entire fund’s value and be responsible for any applicable withdrawal taxes.
If you had not applied for the formal/financial emigration process with the Sarb before or on February 28, 2021, you would have to wait until you were 55 to get your retirement annuity. If the value of your retirement annuity is less than R247 500, you can access the entire amount, minus any taxes that may be due. If the value is greater than R247 500, you can use the one-third/two-thirds concept, which allows you to take one-third in cash after taxes are paid and invest the rest in an annuity for a monthly income.
In summary of the preceding paragraph, the three-year waiting period does not apply to you if you have already reached the age of 55. However, you will only be able to take one-third in cash before paying taxes, and the other two-thirds will have to be placed in an annuity to generate a monthly income. If the available amount is less than R247 500, the entire amount can be withdrawn, subject to relevant taxes.
You can withdraw your retirement pension before the age of 55 if you have already completed the formal/financial process with the Sarb.
Early withdrawals of your retirement annuity will be taxed at a considerably higher rate than withdrawals made after retirement, and leaving the country will result in a presumed capital gains tax burden.
You inquired if it would be a smart idea to stop paying your premiums so that you might avoid any fines for retiring early. The penalties will vary depending on whether you have an older type of retirement annuity or have converted it to a newer form of retirement annuity. Early withdrawal penalties are minimal in the newest form of retirement annuities. I would encourage you to keep paying your premiums for as long as possible.
Please contact a suitably competent advisor who can provide you with expert advice at this time in your life. Best wishes and good luck in this new chapter of your life.
Is a retirement annuity a good idea?
In retirement, annuities can provide a steady income stream, but if you die too young, you may not get your money’s worth. When compared to mutual funds and other investments, annuities can have hefty fees. You can tailor an annuity to meet your specific needs, but you’ll almost always have to pay more or accept a lesser monthly income.
How does retirement annuity payout work?
Eric inquires: Am I accurate in assuming that a RA will guarantee a living allowance for the first ten years of retirement, but that if you die in the eleventh year, the remaining capital of the RA will belong to the insurance company?
Maya responds: Just to be clear, a RA, or retirement annuity, is the term used to describe the accumulation of retirement money in other words, you save into a retirement annuity while working.
When you leave the fund, you must use two-thirds of your retirement annuity to buy an annuity that will provide you an income in retirement.
Your lump amount buys you a predetermined income with a fixed annuity (or life annuity). When an annuity stops paying out varies entirely on the sort of annuity you choose.
A single life annuity and a joint life annuity are the most frequent. A single life annuity will pay you a fixed amount of money for the rest of your life. So, if you die in the second year, the life insurance company keeps the money, but if you live to be 100, they must continue to pay.
Can I cancel retirement annuity?
If you want to terminate a retirement annuity, is R7000 or R70000 the correct amount? Is it possible to terminate a retirement annuity if just R32000 has been paid up?
Answer:
Shinaaz, You can pay up or cancel your retirement annuity at any time, but you will only be paid immediately if the sum is less than R7 000. Otherwise, you’ll have to wait until you’re 55 to apply. If the amount of your retirement annuity is less than R75 000, you do not need to purchase an annuity when you retire.
Long-term contracts
Annuities are long-term contracts that last anywhere from three to twenty years, and they come with penalties if you violate them. Annuities typically allow for penalty-free withdrawals. Penalties will be imposed if an annuitant withdraws more than the permissible amount.
Do you need to be employed to have a retirement annuity?
Over the last few decades, the concept of retirement has changed dramatically. Because of increased life expectancy and a shifting perception of what it means to be human, “Most people do not envision themselves simply sitting on a park bench feeding birds when they retire.
Instead, modern retirement is increasingly being viewed as a time to explore, establish new companies, become actively involved in your passions, and, in some cases, continue to make decent money while doing so. Even if you’re not working full-time, it’s still vital to save for a future income.
Warren Ingram, director of Galileo Capital, summarizes the purpose of retirement planning in today’s world: “The goal is to achieve financial independence as quickly as possible. Nowadays, accomplishing this ambition entails being able to work on projects that you are passionate about and that you want to achieve…”
The primary goal of these savings vehicles is to promote and compel regular contributions toward a retirement income that can be accessible when the person reaches retirement age. (It’s worth noting that lump sum payments made through pension funds, provident funds, and retirement annuities are all taxable.)
To begin with, anyone can purchase a retirement annuity. You could work for a company or be self-employed. Retirement annuities are intriguing to consumers who desire to save for retirement because of a number of factors:
- According to Ingram, the tax advantages of retirement annuities are substantial. You can already deduct 27.5 percent of non-retirement funding taxable income from your taxes.
- One of the reasons for the rise in popularity of retirement annuities in recent years has been their inherent flexibility. While payments to a pension or provident fund are frequently based on a fixed percentage, you can modify your contribution amounts over time.
- You can select the underlying asset classes in which your money is invested with most retirement annuities.
- Retirement annuities can also be used to help in estate planning. Because the cash amount can be given directly to beneficiaries if they take this option, the proceeds are exempt from estate duty, capital gains tax, and executor costs. However, because the regulations in this area are complicated, you should get expert counsel before using a retirement annuity to create your estate.
- Annuities for retirement are likewise protected from creditors. (This excludes revenue payable to the South African Revenue Service, maintenance claims, and Section 37D claims, such as divorce.)
So you’ve achieved retirement age and got a payment from a pension fund or an annuity. So, what’s next? Two-thirds of your money should be put into income-generating annuities.
Your money is invested in guaranteed annuity funds, often known as “traditional” or “life” annuities, and you will be assured a regular income for a set length of time (Discovery’s Fixed Retirement Income Plan is an example of this type of annuity). This regular income is often adjusted for inflation over time, according to Ingram. Income escalations with profits are available in several guaranteed annuities.
The income earned by a living annuity, often known as a type of ‘personal pension plan,’ is not guaranteed and is dependent on the success of the funds in which the cash is placed. (The Linked Retirement Income Plan from Discovery is an example of this type of annuity fund.)
The two-thirds portion of their pension or retirement annuity, or the percentage of their provident fund that they’ve opted to invest, will be invested in this living annuity. Based on a predetermined minimum and maximum amount, you will be able to pick how much money to take as an income.
According to Ingram, savers can withdraw annual income of 2.5 percent to 17.5 percent of their residual capital each year. These are legal restrictions. The Association for Savings and Investment South Africa (ASISA), on the other hand, has issued guidelines requiring its members to notify investors about the consequences of withdrawing too much money or setting the income level too high. Investors who make poor decisions, especially early on, may find that their annuity is depleted too soon.
According to the research that influenced ASISA’s standards, it is generally not desirable for investors to withdraw more than 5% of the value of their residual capital each year if they want their pension to be sustainable.
A preservation fund can be used if you have been contributing to a pension or provident fund but have decided to leave your work and need a safe place to retain your savings until you retire. While it may be tempting to think of a payment as a financial bonus, investing in a preservation fund is the better long-term option for creating a retirement nest egg.
Before retiring, you are authorized to take one lump-sum withdrawal from a preservation fund. Depending on the amount of the withdrawal, it may be taxed.
Whether you invested in a preservation pension fund or a preservation provident fund will determine how you access your preservation money when you retire. (New tax laws may change these restrictions, but those who joined a provident preserver before March 1, 2016 will continue to be covered by the old method.)
- You have the right to take up to a third of your preservation pension fund money if you have one. The remaining two-thirds must be invested in a product that generates income, such as a guaranteed or living annuity.
- You can take the entire lump sum from a preservation provident fund, and you will be taxed on the value of the share you get.
What do you mean by annuity?
An annuity is a contract between you and an insurance company in which you pay a lump-sum payment or a series of payments in exchange for regular payments, which can start right away or at a later date.
Can I surrender my Old Mutual retirement annuity?
Is it possible for someone to terminate his retirement investing contract with an old mutual fund?
Cosma,
Yes, you can fully fund your retirement annuity. You must notify Old Mutual of this, and you may be subject to a surrender penalty if you do so. If the balance on your paid-up retirement annuity is less than R7 000, you’ll have to wait until you’re 55 to get your money.
