The world still seems to be in a grey space right now, doesn’t it?
And on the back of the doom and gloom, we have our finances and the real threat of pay cuts or even job loss to ponder over when our heads hit the pillow in the evening.
A recent article on the STATS SA website sighted 648 000 job losses in the second quarter of last year, so you can only imagine what the numbers look like now…
If you are facing retrenchment and are lucky enough to have a pension or provident fund as a backup, then this article is for you.
When it comes to a choice between paying your monthly bills or cashing in your pension fund, we can understand why you might be tempted to take the cash. The years keep rolling by though, and you need as many years as possible to save up for your retirement. But there are other options. Let us look at just one of those – preservation funds.
What you need to know about Preservation funds
Preservation funds are designed to offer your existing pension or provident fund a ‘home’ or ‘parking bay’ once you resign from a company.
Here’s how it works:
- If you resign from a company that offers a pension or provident fund, you can move the accumulated value in that fund – without paying a single cent of tax – into a pension or provident preservation fund.
- If you belong to both a pension and a provident fund, the pension fund portion would be transferred into a pension preservation fund and the provident portion into a provident preservation fund.
- Your preservation fund works according to the same rules as your company fund. This means that the underlying investments, must be considered ‘safe’ for retirement. This is known as Regulation 28 compliance. For example, not more than 75% can be invested in equity (shares of companies), 30% offshore, and 25% in listed property.
- The second rule is that the growth in the funds you choose to invest in will NOT be taxed. In other words, you will not pay a single cent of tax on the interest earned, the capital gains you make, and the dividends you get paid. The growth in most other investments is taxed in your hands.
- You cannot “retire” from your preservation fund until you reach the age of 55 and you will not be allowed to withdraw in cash more than one-third of the value at retirement. The one-third rule applies to both pension- and provident preservation funds.
- The balance of the value of the fund, or all of it if you do not take any cash, must be used to fund an annuity (monthly income) for you.
4 reasons why a preservation fund makes sense:
- Moving your pension fund away from your company and into your preservation fund means not having to pay a cent in tax on the transferred amount.
- You are entitled to a once-off withdrawal from the preservation fund before retiring. Always handy if you run into trouble before retirement and need money urgently.
- You can invest in a wider range of funds that are better suited to you. Some company funds offer limited investment choices.
- You can always move from a preservation fund and back into a new company fund should you start working for an employer again.
We hope you enjoyed this article, and feel free to leave a comment.
Until next time.
The Wise About Life Team