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Once again this is a continuation of an article we wrote for another insurance website…and which I thought to be way too important for you to miss. So here goes with this weeks financial planning article…

Last week we spoke about the first two options regarding pension or provident funds and resignation from your company.
In that article we discussed paying the tax, and taking the full lump sum in cash. We also discussed moving then amount into any new companies pension or Provident fund and the potential problems involved in that.
Today are going to take a look at the remaining two options:

  1. Retirement annuities.
  2. Preservation funds

So let’s get right to it…

What does a retirement annuity have going for it?

Opting for a retirement annuity means you won’t pay any tax on the amount transferred across to the retirement annuity.
Maybe you want to take a portion in cash and transfer the balance tax-free into an investment? If that’s your plan then a retirement annuity is your only option.
Retirement annuities also allow you to contribute monthly towards growing this investment. The only problem with retirement annuities is the fact that you cannot access your capital until retirement age which is earliest at 55. Then you can take one third in cash (after paying any tax applicable) but the remaining two-thirds must be used to buy yourself a ‘monthly pension’ if I may call it that.
And if you require the money before retirement? Not possible I’m afraid!

What’s the story with preservation funds?

Basically preservation funds works like this…
If you’re currently on a pension fund, you would transfer the lump sum into a pension preservation fund. Likewise, if you’re on a provident fund, you would transfer to a provident preservation fund. This transfer takes place absolutely tax-free.
The reason why so many people opt for a preservation fund is simply because they like the option of accessing the capital at some point in the future prior to normal retirement age. Of course this withdrawal is subject to the same tax applicable when taking the full lump sum in cash at resignation.

A question which often comes up is whether a person can take a portion in cash and transfer the balance into a preservation fund?
The answer is no.
The full amount needs to be transferred into the preservation fund first. If you urgently need some of the capital in cash up front, then a retirement annuity is your answer.

Also bear in mind that only one withdrawal is allowed prior to retirement… So if withdrawal prior to retirement is your strategy, then think carefully before deciding on how much to withdraw. You’re only allowed one shot at it!
At retirement the rules applicable to pension or provident funds would apply. We’ll handle these rules in a later article.
Furthermore, a preservation fund does not allow you to make further contributions towards retirement. Forget about paying R500 per month into your preservation fund!
Each resignation also means a brand new preservation fund -no combining your pension fund lump sums into one large preservation fund.


Kind regards,

The InsuranceFundi team

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