I belong to a pension/provident fund at work: how can I ensure my money is invested in a Shari’ah compliant way?
You must either enquire from the Administrators of the fund, the Asset Consultants or one of the trustees. Talk to us at Oasis, and we will try to be of assistance to you.
What are the withdrawal and tax implications of investing in a retirement annuity?
- Retirement annuities
In South Africa it is permissible to contribute to one or more retirement annuities but only a certain amount will be allowed as a deduction. The Income Tax Act provides that the greater of the following amounts may be claimed as a deduction:
- R1 750;
- R3 500 less any pension fund contributions; or
- 15% of non-retirement funding income.
A salaried employee who does not earn any other income, for example, rental income and income from investments, including interest and dividends, will only be allowed to claim R1 750. A self-employed person who does not belong to a pension or provident fund will be able to deduct 15% of his income. A salaried employee who belongs to a pension or provident fund may also qualify for the deduction of 15% of non-retirement funding income if he earns a high bonus that was not included in his retirement-funding income.
This may seem complicated but, in fact, it is simple – just keep in mind the income used to calculate the pension or provident fund contributions and the balance may be used in the calculation for non-retirement funding income.
- Withdrawal from retirement funds
It is important to contemplate the factors that influence retirement funds on retirement. Retirement from an approved retirement fund is only permitted at the age of 55. If funds are withdrawn before retirement, they do not qualify for the special tax exemption available on retirement. Withdrawal from a retirement annuity is not permitted before the age of 55, whereas the total benefit due may be withdrawn from a pension or provident fund at any time.
- Withdrawal before retirement
||The greater of R1 800 or any contributions made in respect of which no deduction was received is tax-free on withdrawal. For example, where an amount in excess of the tax deductible 7,5% is contributed, the difference between the actual contribution and 7,5% thereof is tax-free at withdrawal. The amount of the withdrawal in excess of this deduction is taxed at the higher of the current and previous year’s average tax rate.|
||The greater of R1 800 or any contributions made where no deduction was received on contributions made to the provident fund will be taxed at the higher of the current and previous year’s average tax rate.|
||Not applicable |
- Withdrawal on retirement
There are certain limitations on withdrawal from a pension or provident fund at retirement. The full benefit due from the provident fund may be taken in cash, whereas only 1/3 of the benefit due from a pension fund or a retirement annuity may be taken in cash as a lump sum. The other 2/3 of this benefit must be used to purchase a life annuity to provide an income for life.
When investing in unit trusts or any of the retirement products, is my initial capital guaranteed?
No. Any product where money is guaranteed is usually invested in an interest-bearing investment which is not Shari’ah compliant. In those insurance-backed guaranteed policies, one pays for those guarantees, which could be very expensive. Effectively one pays a premium to receive less!
Can I access my money if I invest in a retirement annuity or preservation pension/provident fund?
The South African Pension Funds Act restricts withdrawal from a retirement annuity before the retirement age of 55 years. In the case of a preservation pension/provident fund you are allowed to make one withdrawal before you reach 55 years of age of any amount. Note that this withdrawal is fully taxable. Also when making the allowed 1/3 lump sum withdrawal upon retirement on all of the abovementioned products, the withdrawal will attract tax.
How long does it take for funds to be paid in the event that I decide to take a pre-retirement withdrawal from my preservation fund?
Before any payment can be effected, the Administrator will have to apply to SARS for a tax directive, in order for any tax due to be deducted before the balance is paid to you.
The time taken for an individual's investment to be paid into his bank account is dependent upon the region in which the investment is made. In South Africa the process usually takes 3 – 4 working days, provided that all the FICA requirements have been met. Money is transferred electronically to your bank account. Note that no cheques or cash may be issued.
If I die, will my spouse/children receive the money in my retirement fund?
It is important for you to keep your beneficiary details up to date in your retirement annuity fund. In the event of your death there is no reason for the nominated beneficiaries to receive the proceeds, however there are instances where all the necessary parties have not been identified, especially individuals who, at the time of your death, were still dependant on you. In such instances the trustees of the funds may be required to make a decision with regards to disbursement of proceeds that is different to the last allocation split stipulated by the member's will.
Can I nominate a beneficiary for my unit retirement fund?
Yes, you may, and it is imperative that you ensure that these details are kept up to date.
What are the minimum debit order and lump sum contributions in the retirement funds?
|Retirement Annuity Fund
|Preservation Pension Fund
|Preservation Provident Fund
The retirement annuity debit order minimum is R350.00 with an annual escalation applying to all debit orders under R500.00 of 15% per annum.