Can I retire from just one of my many RAs that is doing poorly?

A Moneyweb reader asks:

I’m 55 and plan to keep working until 65. I have a number of retirement annuities (RAs) and preservation funds at different providers. Is it possible to retire from one RA only? Reporting on this RA is poor, and I’d like to retire early and turn it into a living annuity, or preserve it. The paidup penalty is 30%.

Jesse Morgans of Asset Protection International answers:

You can retire from any one RA independently of any other retirement fund. However, a 30% penalty is very hard to make up for.

If you were to have the RA paid up (with penalties) and formally retire from it, that is turn it into an annuity, you’d be able to take up to a third as a cash lump sum. This amount will be taxed.

If you retired from multiple retirement funds (RAs, pension funds, etc.) at different times, while taking a lump sum from each, the lump sums would be aggregated to determine the applicable amount to apply to tax. I strongly recommend you get personalised, professional advice on this before doing anything.

There’s a benefit to having discretionary funds as well as structured retirements funds, as the one is treated differently to the other from a tax perspective. A mixture of both can help to maximise the tax efficiency of the overall portfolio and provide future financial flexibility.

If you had the RA policy paid up and formally retired from the fund, two-thirds of the fund would have to be converted into either a living annuity or guaranteed annuity.

If you choose a living annuity, you’re forced to take an annual withdrawal of 2.5% to 17.5%. This is fully taxable as income in your hands.

With a 30% penalty one could assume that the maturity date would be quite a few years away. I’d recommend you find an independent advisor who is able to manage the investment and report to you on the performance each year.

After the maturity date (provided the policy isn’t rolled over) you have the following options: 1. Leave it paid up. 2. Transfer it to a better service provider at no cost (a section 14 transfer), where it remains as an RA until you wish to retire from it.

3. Exercise a retirement option with or without a lump-sum withdrawal, and turn it into an annuity with a better service provider.

It may be preferable to have all the RAs and preservation funds transferred to one service provider where it can be more efficiently managed and reported on to you.

With 10 years to retirement you should probably be maximising your contributions to a retirement savings pool rather than retiring from a policy and triggering potential tax consequences and penalties.

Every investor should seek personalised retirement advice well before their retirement date. – Moneyweb