A Fin24 user 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.
- Fin24
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