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Retirement Planning

Retirement Annuity

A retirement annuity is the policy which is selected by a member or prospective member of a retirement annuity fund and taken out to accumulate the capital to provide the member with an annuity income at retirement. The member’s contributions to the retirement annuity fund are used as contributions for the policy. It is a tax effective retirement investment vehicle for individuals as contributions are tax deductible and the investment growth is exempt of capital gains tax. The primary target market is individuals who do not participate in an pension or provident fund, but the retirement annuity is still available to such individuals.

Preservation Fund

If you change employer and move from a company which has a pension or provident fund to a new company it will be your advantage to preserve your retirement savings in a tax efficient vehicle. Preservation funds have been designed with this purpose in mind.

Preservation funds can also be used if you are retrenched, resign, if your employment is terminated or if your occupational retirement fund is closing down. Preservation funds can also be used to house the proceeds of an amount awarded to a non-member spouse in terms of a divorce order.

For the most part, preservation funds are subject to the same rules as pension funds, provident funds and retirement annuities. Underlying holdings should be invested according to pension funds guidelines and the trustees of the fund have an obligation to the dependants of the member, in the event of the death of the member.

The central difference between pension funds and provident funds is that on retirement, a pension fund member may take a maximum of one third of the benefit in cash, whereas a member of a provident fund may take the full value of the proceeds of the retirement fund in cash, subject to the requirements of the South African Revenue Service.

It follows that the rules of pension and provident funds should be maintained in a preservation fund. A pension preservation fund is designed for former members of a pension fund while a provident preservation fund should be used by former members of a provident fund.

Preservation fund rules permit members to have access to their benefit on one occasion only, before retirement date in the event of retrenchment or ill health. If members elect this option, they can withdraw all or part of their benefits.

Living Annuity

A Living Annuity is a post-retirement product that allows you to re-invest your accumulated retirement savings to provide a retirement income, while targeting further investment growth.

You can choose to invest in a broad range of unit trusts, a selection of hedge funds, and a wide array of shares and other securities through the Private Share Portfolio. (You can choose any combination of underlying investments, but it might be prudent to adhere to the guidelines set by Regulation 28 of the Pension Funds Act.) Each year, you must withdraw between 2.5% and 17.5% of your investment as income.

This gives you the flexibility to control your investment. As your returns are not guaranteed, it also gives you the responsibility of making sure that you invest appropriately and choose a withdrawal rate to make your retirement capital last. It is advisable to ask a financial adviser to assist you.

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