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Retirement Funds

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?

In South Africa the current Retirement funds contributions are limited to 27.5% of the greater of remuneration or taxable income capped at an annual limit of R350 000. Any excess may be carried over.

 
-  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 If funds are withdrawn before retirement, they do not qualify for the special tax exemption available on retirement. Withdrawal from a retirement annuity is not permitted before the age of 55, whereas the total benefit due may be withdrawn from a pension or provident fund at any time.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
 

Fund Withdrawal Yes/No Tax implications
Pension fund Yes 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.
Provident fund Yes 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.
Retirement annuity No Not applicable

 

   

 

 

 

 

 

 

 

 



Deductions Retirement*

Current Pension Fund Contributions
Prior to 1 March 2016
Limited to 7,5% of remuneration from retirement-funding employment(the amount taken into account to determine contributions to a pension or provident fund) or R1 750, whichever is the greater. Excess contributions are not carried forward to the next year of assessment but are accumulated for the purpose of determining the tax-free portion of the lump sum and/or annuity upon retirement.


Arrear Defined Benefit Pension Fund Contributions
Up to a maximum of R1 800 per year. Any excess may be carried forward.


Current Retirement Annuity Fund Contributions
Limited to 15% of taxable income from non-retirement-funding employment,excluding any retirement fund lump sum benefits, or R3 500 less current contributions to a pension fund, or R1 750, whichever is the greater. Any excess may be carried forward.


Reinstated Retirement Annuity Fund Contributions
Up to a maximum of R1 800 per year. Any excess may be carried forward.


Income Protection Contributions
Prior to 1 March 2015, insurance premiums paid on income protection policies to the extent that such amounts received under the policy constitute income.

Pension, Provident and Retirement Annuity Fund Contributions
As from 1 March 2016
The total contributions to retirement funds are deductible but limited to 27,5% of the greater of remuneration or taxable income (excluding lump sums), prior to the deduction for donations, capped at an annual limit of R350 000. Any excess may be carried forward.


Contributions paid by the employer are taxed as a fringe benefit in the hands of the employee and are deemed to be contributions paid by the employee in order to calculate the allowable deduction.The employer deduction for contributions made to these funds on the employee’s behalf is not subject to any limitation (2016 : 20% of remuneration).


Annuitisation Rules
Pension and retirement annuity funds are subject to the one-third lump sum and the two-thirds annuity rules unless the lump sum is below R247 500 (2016 : R75 000).


As from 1 March 2018, lump sums from provident funds will be subject to annuitisation and apportioned to ensure contributions made prior to 1 March 2018 and the resultant growth may be paid out as a lump sum. Where the member will be at least 55 years old on 1 March 2018 the lump sum from the provident fund is not subject to the annuitisation rules.


*  The above information serves as a guide. Please consult your tax advisor for any specific tax advice required


Benefits in terms of paragraph (b)(x)(cc) of the definition of “retirement annuity fund”
Benefits
Paragraph (b)(x)(cc) of the definition of “retirement annuity fund” in section 1 allows for a lump sum benefit from a paid-up retirement annuity in circumstances where the value of such benefit is less than an amount determined by the Minister of Finance from time to time. This amount is currently R7 000.

Withdrawals from a retirement annuity fund upon emigration

Benefits
The Taxation Laws Amendment Act, No. 3 of 2008 amended the definition of “retirement annuity fund” in section 1 – paragraph (b)(x)(dd) – to allow members who emigrate from South Africa to withdraw their funds prior to attaining retirement age. This provision applies only to retirement annuity funds.

 

-  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. 


What is the process for funds to be paid in the event that I decide to take a pre-retirement withdrawal from my preservation fund?
 

Once your Withdrawal form and all relevant documents have been received, the administrators will apply for a tax directive from SARS.  Any tax due to SARS will be deducted including fees and charges incurred by the Administrator in processing the transaction before the funds are paid over to you.

You can track the progress of your instructions by contacting our Client Services Department on 0860 100 786.

Pre-retirement withdrawals can significantly impair long-term accumulation necessary to fund retirement and cannot be replaced.

Please consult your Financial Advisor should you wish to do a pre-retirement withdrawal to ensure that you have made an informed decision.


In the event of my death, will my spouse/children receive the money in my retirement fund?
Retirement funds are governed by specfiic fund rules and legal requirements. These rules and requirements are different from other investment
products and affect how death benefits are paid out. To understand how the trustees allocate the benefit it is useful to understand the difference
between a dependant and a nominated beneciary (nominee):

Dependents:
The Act defines dependants as spouses, children, and anyone proven to have been financially dependent on the member, or entitled to
maintenance, as well as anyone who may in the future have become financially dependent on the member.

Nominees:
If the fund does not become aware of or cannot trace any dependant of the member within twelve months of the death of the member:

  •     and the member has designated in writing to the fund a nominee who is not a dependant of the member, to receive the benefit or such portion
  •     of the benefit as is specfied by the member in writing to the fund,
  •     the benefit or such portion of the benefit shall be paid to such nominee:
  •     Provided that where the aggregate amount of the debts in the estate of the member exceeds the aggregate amount of the assets in his estate,
  •     the difference between such aggregate amount of debts and such aggregate amount of assets shall be paid into the estate and the balance of
  •     such benefit or the balance of such portion of the benefit as specfied by the member in writing to the fund shall be paid to the nominee.

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?

 

Lump Sum Debit order
Retirement Annuity Fund R5 000.00 R350.00
Preservation Pension Fund R10 000.00 Not permitted
Preservation Provident Fund R10 000.00 Not permitted

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.

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