Benefits to keeping retirement savings in a preservation fund

They are still appealing despite new options now available

● There are good reasons for preserving your retirement savings in a preservation retirement fund despite the competing options now open to you when you change jobs.

Recently introduced regulations under the Pension Funds Act are likely to result in more members preserving their retirement savings in employer-sponsored and umbrella funds that should have lower costs than preservation funds and retirement annuities available to individuals.

Within 18 months of the regulations taking effect on September 1 last year, retirement funds are required to preserve your savings in your fund and only pay you out or transfer your savings to another fund if you request it.

With “in-fund preservation” and the ability to transfer your savings to a new fund you may join — known as “portability” — you potentially have four options for preserving your retirement savings.

In addition to this competition to preservation funds, tax law amendments aimed at aligning the incentives that savers in pension and provident funds enjoy could take away the need for separate pension and provident preservation funds.

Access to cash

Preservation funds have, however, always had a trump card over the arguments for preserving in-fund or in an RA.

Preservation funds allow you to take part of your retirement fund benefit as cash — after you pay the tax — and then transfer the balance tax-free to the fund. You are then allowed to make one further withdrawal — either part of your savings or all of it — from that fund before retirement.

If you transfer your savings to an RA, your savings must be transferred in full and then you cannot access them until at least age 55, unless you take early retirement for illhealth, or emigrate.

If you preserve your savings in the employer-sponsored or umbrella fund of an employer you are leaving and need to access that money later, you can probably at that stage transfer to a preservation fund that allows a partial withdrawal, says Anton Swanepoel, legal adviser at Sanlam.

Janet Hugo, an independent financial adviser at Sterling Private Wealth, says the access to your savings that preservation funds provide is an important factor because you never know when you’ll need cash.

Transparency

Steven Nathan, CEO of retirement fund provider 10X, says members in a pension preservation fund can withdraw before retirement and avoid being forced to buy a pension with two-thirds of the money at retirement. This does, however, entail paying the higher tax on the withdrawal and giving up the security of income that being forced to buy a pension will probably give you.

Another advantage of the preservation fund is you can transfer the balance of your savings back to an employer fund, even after you have made the one withdrawal.

Hugo says preservation funds on investment platforms are often more transparent about underlying investments and costs than employer-sponsored and umbrella funds. The lack of transparency makes it difficult for advisers to provide you with accurate performance comparisons for your choices.

The disclosure of umbrella fund costs is not yet standardised, but the Association for Savings and Investment South Africa plans to oblige its member companies to disclose an effective annual cost for these funds.

The disadvantages

No further contributions: The big drawback of the preservation fund is that it does not allow for you to continue contributing to the fund, Nathan says. This is also true for preserving in the employer-sponsored fund of an employer you are leaving.

If you want to keep saving through a retirement fund after leaving formal employment — if, for example, you open a business or do contract work or want a deduction against passive income such as rental income or an annuity — you would have to do so through an RA, Nathan says.

This would give you the ability to deduct your contributions from your taxable income or remuneration up to 27.5% of that income or remuneration (whichever is higher) but limited to R350 000 a year.

Emigration: Currently if you transfer your savings to a preservation fund and later decide to emigrate, you probably won’t be able to access your savings until retirement age, Nathan says. If the balance in your pension preservation fund is above R247 500 you would have to leave your money in the South African fund and at retirement age buy an annuity with two-thirds of your savings in the fund, Nathan says.

You can avoid this by transferring your preservation fund savings back to an employer fund or an RA, as savings in these can be accessed on emigration. But this disadvantage may fall away. The National Treasury’s Budget Review notes the government’s intention to bring the treatment on emigration of savings in a preservation fund in line with that of RAs.

Hugo says an advantage of a preservation fund is that having two funds allows you to retire from the funds at different dates.

Staggering your retirement from different funds could also be beneficial if the tax exemptions on lump sums taken at retirement are increased, as they were from R350 000 to R500 0000 a few years ago.

Retirement funds are an excellent estate planning tool and not subject to capital gains tax, income tax and estate duty, Hugo says.

Last year the Pension Funds Act was amended to allow you to transfer your savings in a pension or provident fund to an RA after your retirement date. This was also to encourage you to postpone your retirement if you can work after retirement.

Transfers to pension preservation and provident fund preservation funds were excluded, but in the Budget Review, the Treasury says it plans to cater for these transfers in future legislative amendments.

It is likely that you will be denied the onetime withdrawal of savings transferred to a preservation after retirement, says Kobus Hanekom, principal consultant at Simeka Actuaries & Consultants, the retirement fund consultants in the Sanlam group.

However, being allowed to transfer to a preservation fund after retirement will ensure you are not trapped in a retirement fund with “in-fund options” that do not compare favourably with what RA and preservation funds have to offer, he says.

Preservation funds on investment platforms are often more transparent Janet Hugo Independent financial adviser, Sterling Private Wealth