Financial advice needed wrt Provident fund money

[TjaartvdW]

Hi Folks

Whilst we are busy throwing our Cricket World cup chances away (90/6 after 24.6 overs) - I would appreciate some info from all the financial gurus on the forum pls.

I'm battling a bit to grasp the whole Pension fund vs. Provident fund thing and the tax implications at the time of one's retirement

I contribute to a provident fund at my current employer. These contributions, contrary to pension fund contributions, are currently non-tax deductable.

Once I resign I would like to re-invest this money with a fund, or any 'type' of fund for that matter, as long as the investmet at the time of my retirement (in approx 23 years time) can be tax free (as I understand the concept of the provident fund, with my current employer is..)

What / Which funds or Investment opportunities can I look at...?

I contacted a major investment management firm, who gave me the following info wrt tax on a provident fund investment upon retirement (Surely this cannot be correct...?)

"The tax free portion upon retirement, if withdrawing a cash lump sum from your Provident Preservation Fund, is calculated according to a formula stipulated by SARS and it works as follows:

Number of completed years of employment/contributory membership, divided by 10, times your highest average annual salary over any 5 consecutive years. This is limited to the maximum of the greater of:

• R120 000 or

• R4 500 x number of years of service plus the employers own contributions not previously allowed as a deduction"

If the above is true, then why would one contribute to a provident fund, where the contributions are non-tax deductable, as opposed to a pension fund for example...

I would appreciate any advice from those of you who are knowledgable in this field. Wont hold you to anything...

Much appreciated

Tjaartvdw

[Springbok]

I'm battling a bit to grasp the whole Pension fund vs. Provident fund thing and the tax implications at the time of one's retirement... Once I resign I would like to re-invest this money with a fund, or any 'type' of fund for that matter, as long as the investmet at the time of my retirement (in approx 23 years time) can be tax free (as I understand the concept of the provident fund, with my current employer is..)

What / Which funds or Investment opportunities can I look at...?

see Allan Gray's retirement products for more info - have a look at their Preservation funds. Once you resign, you can move your Provident or Pension fund over to Allan Gray Provident / Pension Preservation funds. And you can decide in which underlying fund or funds you want to invest. If you are younger than 35, I would suggest Allan Gray Equity Fund. Older than that and into your 40s, maybe the Balanced Fund. Near or at retirement, go for the Stable Fund. Of course you can also choose a mix of that, depending on your personal circumstances and appetite for risk.

Pension Preservation:

At termination of your membership with your employer’s pension fund, the benefits in your pension fund can be transferred to a pension preservation fund.

- No tax is payable on the money transferred in this manner.

- The pension preservation fund allows for a single withdrawal of any portion of the capital in the fund prior to retirement.

- The amount contributed to a pension preservation fund can be invested in one or a combination of unit trust funds.

- At retirement, a maximum of a third of your capital can be taken as cash while a minimum of two thirds must be used to purchase a pension-providing vehicle such as the Allan Gray Living Annuity.

Provident Preservation:

At termination of your membership with your employer’s provident fund, the benefits in your provident fund can be transferred to a preservation provident fund.

- No tax is payable on the money transferred in this manner.

- The preservation provident fund allows for a single withdrawal of any portion of the capital in the fund prior to retirement.

- The amount contributed to a preservation provident fund can be invested in one or a combination of unit trust funds.

- At retirement, the total capital in your fund can be taken as a cash lump sum while any contribution to a pension-providing vehicle such as a living annuity is voluntary

Whenever you make that cash withdrawal, before or at retirement, you will be taxed on that, at your average marginal tax rate of the 2 years prior to the withdrawal (I think). My Provident Fund from my previous employer is in the Allan Gray Provident Preservation Fund. If I take everything with me to Australia now, I will be taxed at quite a high rate. But if I take the funds only after I have been in Australia for a minimum of 2 years, I would not have earned any income in SA and hence the applicable tax rate will be at the minimum level. You can of course also leave your funds with Allan Gray until retirement - their performance should be good enough to compensate more than enough for inflation as well as depreciation of the rand vs. the aussie dollar. The other unknown of course is what will the exchange control rules be like when you retire in 20 years time? Will you be able to get all your funds out of SA?

So if you do want to take your funds with you to Australia, do it only after you have been in Australia for at least 2 years, so that you pay the minimum tax when you make that single withdrawal.

Edited April 25, 2007 by Springbok

[Mara]

A question for you Springbok, if you only bring the funds over to Australia after two years, would it be regarded as income in Australia (taxable) or capital (non taxable)?

Please take care when investing in a Superannuation Fund in Australia, my experience is to go for a pure superfund and not a bank or insurance company superfund. In our case we have proof that the pure superfund appears to be the better of the two as all the contributions minus the administration fees are contributed to the members. With the bank/insurance superfunds it appears that the funds go into their melting pot of different divisions and a portion of the earnings on your contribution goes into the superannuation fund.

My husband and I earn the approximately the same salary. Our employers have contributed to our superfunds for 10 years. For the whole period I belonged to a pure superfund, my husband belonged to a bank/insurance superfund, yet my superfund today is worth nearly double what my husbands is. Go figure! Needless to say, as soon as the laws changed and we were allowed to chose our own superfund, he changed to a pure superfund.

Please be careful in your choice of superfund in Australia!

[Pixi]

[Once I resign I would like to re-invest this money with a fund, or any 'type' of fund for that matter, as long as the investmet at the time of my retirement (in approx 23 years time) can be tax free (as I understand the concept of the provident fund, with my current employer is..)

If the above is true, then why would one contribute to a provident fund, where the contributions are non-tax deductable, as opposed to a pension fund for example...

Tjaart, hoekom provident fund? As jy hier sou bly en oor 20 jaar gaan rus het, sou jou maandelikse geld vanaf die provident fund belasting vry gewees het. Jou maandelikse geld van die pensioenfonds sou egter belasbaar gewees het.

Hoekom beide se lompsom onttrekkings basies dieselfde belas word, kan ek net raai dit het met die idee te doen dat die regering nie wil he die mense moet hulle geld onttrek (en alles kan as lompsom geneem word by provident fund en net 'n derde by pensioen)en dan binne 'n jaar of 2 is daai mense van die staat afhanklik vir oumens pension.

[TjaartvdW]

Hi

Springbok - Thank you for the advice. I was hoping to get some from you. Much appreciated !!!

Mara - Also good input from your side. Thank you. Would you mind posting the names of some of these 'pure' Superfunds pls...? I would then go read up on them.

Pixi - Good question. Thing is that when I joined the Company the only option we had was their Provident fund. Only the 'old timers' at the company belonged to the pension fund. But you make a good point... seemingly I would also have liked to rather contribute to pension fund, where the contributions are tax-deductable, as opposed to a provident fund, if both the investments are taxable at the end of the day.

Why both are taxable at the end of the day, I dont know...

Thanks again folks.

Tjaart

[woodag]

...

Please take care when investing in a Superannuation Fund in Australia, my experience is to go for a pure superfund and not a bank or insurance company superfund. In our case we have proof that the pure superfund appears to be the better of the two as all the contributions minus the administration fees are contributed to the members. With the bank/insurance superfunds it appears that the funds go into their melting pot of different divisions and a portion of the earnings on your contribution goes into the superannuation fund.

...

Given that superannuation is a long term investment, and small differences in annual return can make a big difference in the long run, it will certainly pay to find a fund with low overheads. I have not heard of the term "pure superfund" though. Some of the super funds with the lowest fees are the so-called "industry funds", so named because many were for workers in particular industries (not necessarily the case any more). Their fees are low compared to the "retail funds" as run by banks and insurance companies because they don't have salesmen on commission and shareholders with their hands in your pockets.

Examples of industry funds: AustralianSuper and Cbus. More at:

http://www.industryfunds.org.au/iff/index.cfm?contentid=432

[Springbok]

A question for you Springbok, if you only bring the funds over to Australia after two years, would it be regarded as income in Australia (taxable) or capital (non taxable)?

Thanks for that Mara, I guess it's for the Australian authorities to decide, but my guess is that it should be seen as capital. As part of your (South African) offshore allowance of R2 million. The funds were not generated to be used for day-to-day living, but rather as savings for retirement. Maybe someone in Australia can verify this, for the benefit of the forum?

[Mara]

Hi Woodag

Industry funds is probably the right wording, perhaps it is just our Australian Super rep that likes to call it a 'pure' fund. The industry funds that I have dealt with in Australia that I have liked, are in ranking order

Australian Super

Rest

Hesta

[PFP]

If the above is true, then why would one contribute to a provident fund, where the contributions are non-tax deductable, as opposed to a pension fund for example...

It is important not to underestimate how large one's own contributions (that is employee contributions) can be at retirement on a provident fund. So the lumpsum could be R120k plus a few hundred thousand in contributions. This total is tax free. So in reality the tax you pay is on the investment return.

The bigger question though is that if you are posting on this site, why would you consider a 23 year time horizon in SA if you are thinking of Aus? Besides exchange rate risk there is the real risk of legislation changes that locks your funds in SA.

As we speak legislation is being drafted to make it compulsory to preserve your pension funds until retirement. Fortunately it seems sanity will prevail and rights to funds accumulated prior to the legislation change will be retained so that these funds may still be withdrawn.

Thanks for that Mara, I guess it's for the Australian authorities to decide, but my guess is that it should be seen as capital. As part of your (South African) offshore allowance of R2 million. The funds were not generated to be used for day-to-day living, but rather as savings for retirement. Maybe someone in Australia can verify this, for the benefit of the forum?

I tend to agree with Springbok. After all you would have already been taxed on these funds albeit at a far reduced rate after the 2 year period.

Unfortunately it appears that this "2 year loophole" is likely to be closed by legislation soon.

[Dax]

My husband and I earn the approximately the same salary. Our employers have contributed to our superfunds for 10 years. For the whole period I belonged to a pure superfund, my husband belonged to a bank/insurance superfund, yet my superfund today is worth nearly double what my husbands is. Go figure! Needless to say, as soon as the laws changed and we were allowed to chose our own superfund, he changed to a pure superfund.

You hit the nail right on the head Mara! Go for Industry funds and avoid the others.

If ever anyone reading here ends up in the South Australian Goverment Service at some stage, I would reccommend "SSS" Industry Super Fund.

I also contribute a fixed amound fortnightly in addion to my employers' contributions and I have seen some great growth in my members' account over the past 8 - 10 years.

Tjaart, i hope i did not miss anything and am giving you wrong info, but if you can bring your retirement money out of RSA at some time and as we say here in Oz, roll it over into your Aussie Superfund, you should see some sizable growth over the meduim to long term.

Cheers,

Dax

Edited April 27, 2007 by Dax