A taxpayer writes:
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 Pretoria-based Fidius, responds:
Some of the assumptions I make are that by “receiving” your provident fund, you are terminating participating employment with the fund. Also “preserve it” means you want to reinvest 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 the following opinion based on the above assumptions:
1. 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 guaranteed annuity (GA) or a living annuity (LA) to accommodate the residue after withdrawal of a portion for discretionary capital, emergency funds etc.
2. 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.
3. 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 to assist you to make informed decisions. 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. The LISP option is usually the better option, but should be considered with a monitoring instruction to a qualified adviser to take responsibility to lead you through the process in terms of the Financial Advisory and Intermediary Services Act.
4. 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 the flexibility and asset class exposure you need to achieve your return objectives.
5. There are many pitfalls and portions of legislation that can affect the implementation. To make sure you get it right, you should arrange an appointment with a practising certified financial planner (CFP) and insist on dealing on a fee basis, as commissions on transfers can sometimes be exuberant.
All fees must be declared in writing, in advance and in monetary terms. Your instruction should consider the following wording:
“Advise me on a suitable and appropriate product (to preserve my current provident fund proceeds), risk profile and investment strategy to limit tax and achieve my objectives in real terms for retirement at age (for example 55), provide for a withdrawal from the fund at retirement/or prior if necessary (specify the amount and time) and expose the residue to provide a real income and growth achievable over my planning term/life expectancy.”
6. All advice and any projections must be accompanied by supporting calculations and modelled possibility of achievement illustrated over time. It is advisable to have a monitoring agreement with your adviser, to take responsibility to provide continuous due diligence on the advice so that it can be realigned at least annually with the original (and your changing) objectives.