Preserving your provident fund
I’m about to receive my provident fund money and want advice on how I can preserve it. I want to invest a portion as an endowment and want to use another portion to buy an annuity.
Are there such products in the market? Which companies?
Arno Burger, a certified financial planner and registered tax practitioner with Fidius, responds:
Some of the assumptions I make are that by “receiving” your provident fund, you are terminating participating employment with the fund. Also “ppreserve it” means yyou want to reinvestinvest the value to accumulate in real terms until retirement, at which stage you want to invest a portion as discretionary capital (”an endowment”) and the residue must be used to “buy an annuity” — income over your outstanding planning term.
Yes, there are such products and options, and you can consider this opinion based on the above assumptions. • The product to accommodate the transfer is a preservation provident fund (PPF) and you can instruct the trustee of your current provident fund (PF) to transfer your fund proceeds tax-free. This product will be suitable for preservation until retirement, when you should consider a gguaranteed annuityy (GA) or a living g annuity (LA) to accommodate the residue after withdrawal of a portion for discretionary capital or emergency funds, etc. • A PPF allows for one withdrawal before retirement, which can be any portion or all of the fund value. Withdrawals prior to retirement (age 55) are taxed and deducted from future tax-free retirement lump sums. To save on tax, the full value of the PF should be transferred to a PPF. A proportional withdrawal to supplement discretionary funds must be carefully considered, postponed until retirement if possible and limited to minimise tax. The current tax-free lump sum at retirement is R315 000, where withdrawals before retirement will attract tax on amounts above R22 500. • Most insurance companies and linked unit trust investment platforms (LISPs) offer the product. It is advisable to distinguish between the two and get a written comparison between the options. Such a comparison should at least illustrate fees and availability of funds for exposure of your investment.
Switching between underlying investment funds should be free of charge and simple. Your funds should be available for your direct log in and easy tracking on the Internet. • Common advice will focus on the product and emphasise the transfer free of tax, as well as no tax on growth within the fund. The problem with this type of counsel is usually the neglect of advice on the correct product to give you ththe flexibility and asset class exposure you neneed to achieve your return objectives. • There are many pitfalls and portions of legislalation that can affect the implementation. To mmake sure you get it right, you should arrange an appointment with a practising certified finanancial planner (CFP) and insist on dealing on a fee basis.
All fees must be declared in writing, in advavance and in monetary terms. Your instruction shshould consider the following wording: “Advivise me on a suitable and appropriate product (tto preserve my current provident fund proceceeds), risk profile and investment strategy to limlimit tax and achieve my objectives in real teterms for retirement at age (for example 55), prprovide for a withdrawal from the fund at retirtirement/or prior if necessary (specify the amamount and time) and expose the residue to prprovide a real income and growth achievable ovover my planning term/life expectancy.”
Sharing her experience of a dramatic improvement of her business after joining a savings club is Sizani Ngubane. Pictured are (from left) Thobekile Maphumulo (Mkhambathini Municipality mayor), Professor Krish Govender (vice chairperson of the KZN Financial Literacy Association), Ina Cronjé (KZN MEC for Finance), Sizane Ngubane, Anton Krone (deputy chairperson of the Woman and Vulnerable Groups committee of the Association) and Yusuf Bhamjee (SaveAct Executive Director and uMgungundlovu District Municipality mayor). A graduation ceremony was recently held for about 300 women from the Table Mountain area, under the auspices of the KZN Financial Literacy Association and the KZN Treasury. The women — who are members of the SaveAct-promoted savings and credit groups — were recognised for their roles in establishing the memberled groups, as well as for their participation in an innovative financial education programme. SaveAct is a non-profit organisation that was established in 2005 to promote saving.