Provident Fund

[Pippa]

Hi Everyone,

I’ve resigned from work last week and will now have to start making a decision as to what to do with my provident fund . Ultimately, I would not want to pay tax and believe that if I leave my provident fund here in SA without earning an income for 2 years, I would be able to withdraw the monies after 2 years with a reduced tax percentage. Now I understand that part…

The one thing that I am unsure about is to what type of fund I should choose to put it in should I decide to leave it here in SA with Alan Gray for example. Can I leave it in a money market account or does it have to be a preserve fund (or is it the same thing???) Sorry, but I don’t know anything about all these different options .

Whilst visiting Alan Gray’s website, I saw that they have an Alan Gray-Orbis account that looks like an offshore investment… Would I be allowed to put it in such a fund or will I then have to pay tax on it ?

(By the way, we are going to apply for a tax clearance with SARS, but I am not sure what I should do with my provident fund’s monies.)

Springbok, Bronwyn and all the bankers out there, please help me with this, as I am totally blond on this !

I look forward to your replies.

Lovies, Pippa! X

[Springbok]

Hi Pippa

Yes you got part 1 right.

Part 2 - Your Provident/Pension fund can be transferred to a Provident/Pension Preservation Fund, such as Allan Gray's. Note that at termination of your membership with your employer’s Provident/Pension fund, the benefits in your provident fund can be transferred to a Preservation fund. You cannot invest in a Preservation fund on your own.

However you still have to choose the underlying funds of which your Preservation Fund consists. Allan Gray (AG) has many domestic and offshore options. The Domestic options are AG Equity Fund, AG Balanced Fund, AG Stable Fund, AG Money Market Fund, AG Bond Fund and AG Optimal Fund. The Offshore options are AG Global Fund of Funds and AG-Orbis Global Equity Feeder Fund.

You can choose to invest in any 1 of these funds, or any combination therefore, depending on your risk and return constraints. Those are things like age, time horizon, risk appetite, etc.

High risk/return funds: AG Equity Fund and AG-Orbis Global Equity Feeder Fund.

Medium risk/return funds: AG Balanced Fund and AG Global Fund of Funds.

Low risk/return funds: AG Stable, Bond, Optimal and Money Market Funds.

Please note that due to foreign exchange control regulations, the offshore options, i.e. Allan Gray-Orbis Global Fund of Funds and the Allan Gray-Orbis Global Equity Feeder Fund, are closed intermittently during the year. As at 31 March 2007, these two funds are CLOSED for investment by Preservation Funds. So only the domestic options are currently available and they are [in order of highest to lowest risk/return]:

The AG Equity Fund should be considered by those seeking superior long-term capital appreciation at an average exposure to risk. Ideal for investors in the early stages of their careers with the main aim of building capital and ability/willingness to take on a reasonable amount of risk.

The AG Balanced Fund's returns can be expected to be more stable than those of the Equity Fund, but the risk of monetary loss is lower. This fund is appropriate for investors nearing retirement.

The AG Stable Fund offers a high degree of capital stability while aiming to produce returns that are superior to bank deposits on an after-tax basis. The Allan Gray Stable Fund aims to achieve its objective through a combination of high income with some capital growth. Ideal for investors at or after retirement.

The AG Optimal Fund is housed within the Domestic Equity, Varied Specialist Fund sector. It is a long-term, absolute return fund for the investor who wishes to avoid the volatility generally associated with stock and bond markets, but still wants exposure to specialist stock picking skills and to enjoy an acceptable positive rate of return which is higher than that of cash.

The AG Bond Fund is suitable for those investors seeking returns in excess of that provided by income funds, money market or cash investments and who are prepared to accept some risk of capital loss in exchange for the prospect of earning increased returns. The Fund will also suit investors who want to draw a regular income stream without consuming capital.

The AG Money Market Fund offers a high degree of capital stability with the highest income of the Allan Gray unit trusts.

So for your situation, Pippa, I would recommend up to 100% in the AG Equity Fund, or a mix (e.g. 50/50) between the AG Equity and Balanced Funds. That would then make up your Preservation Fund. No need to bother with the Stable/Optimal/Bond and MM funds.

Please note that these are my own opinions and how I have invested my Provident Fund from my previous employer and I will do the same with my Pension fund of my current employer.

After 2 years in Australia, I will consider cashing out 100% (depending how the AG funds did), pay the minimum tax and invest all the proceeds in an above-average performing Australian superannuation fund.

Regards

Charl

Edited May 7, 2007 by Springbok

[Bob]

Ok, Pip . . . . that is pretty good advice for what to do in the medium term up to when you're able to transfer your money from South Africa to Australia.

I was a bit confused about what South Africans define as a "Provident" fund.

I take it now that the equivalent scheme in Australia is called a "Superannuation" fund . . . . same thing, in that you park your money in a scheme to build up a nest-egg for you to draw on in old age.

When you get to Australia, you'll no doubt enter the workforce.

Everyone in Australia gets 9% of their gross wages / pay / salary paid into a Superannuation fund so that you can have a nest-egg to draw on in retirement.

Until recently, your company would plop your 9% into whatever Super scheme they felt convenient, so if you changed jobs, you'd probably have your 9% going into a totally different Super scheme than the previous company's Super scheme.

Since 1st July 2005, a person can now nominate whatever Super scheme they want, by law, and the company has to deposit your 9% into that scheme of your choice ..... NOT whatever scheme they had going!

This will stop you having a different Super account with various Superannuation schemes for every different job you do in your lifetime and paying "management fees" and/or "account keeping fees" on each and every one of them!

There are basically two main types of Superannuation schemes available for Australian workers / employees to park their 9% in.

"Commercial" Super schemes:

"Industry" Super schemes.

I define "commercial" super schemes as those set up by the banks, life insurance companies, etc. and they not only charge a management fee but also have to take a big chip out of your interest each and every year to pay for the bank's / life insurance company's fees and return to their shareholders.

Looking at returns over the past 5 or 10 years, you'll see that the average returns to clients with commercial super accounts compared to those clients with their 9% in an "industry" super scheme is about 1% or 2% less each and every year.

That can add up to a lot of $$$$$$ over a 20 or 30 year period!

My advice when you start work and get asked what Super scheme you want your 9% to get paid into, is to nominate an "Industry" super scheme.

Industry Superannuation schemes are those started up by your Union or Professional Association and their returns each year go mainly to their clients . . . . not to some "fat cat" in a BMW working for a bank and all the shareholders!

You'd also be wise, when you get your cash-out from your South African Provident fund, to think of parking it in one of the Industry Super schemes also, if you don't wish to put it towards buying a house or some other worthy payment like that.

[Springbok]

Since 1st July 2005, a person can now nominate whatever Super scheme they want, by law, and the company has to deposit your 9% into that scheme of your choice ..... NOT whatever scheme they had going!

My advice when you start work and get asked what Super scheme you want your 9% to get paid into, is to nominate an "Industry" super scheme.

Industry Superannuation schemes are those started up by your Union or Professional Association and their returns each year go mainly to their clients . . . . not to some "fat cat" in a BMW working for a bank and all the shareholders!

Great advice, Bob! My aim is to identify about 5 of these industry super funds that will deliver performance similar to that of Allan Gray in South Africa, over the long term. AG has a proven track record of superior returns since 1974, their average annual performance over the last 32 years is 30.4%! See the chart on the homepage http://www.allangray.co.za Now THAT is proper money management and why I am happy to park my funds with them.

So among the Aussie Industry super funds, I'll be looking for a track record of at least 10 years, a history of consistent, above-average performance and an average annual growth rate of at least 20%. Will share the findings of my research, but maybe Bob (and others in Australia) already have a few ideas?

Cheers

Charl

PS - these 2 links seem like a good start for research on super funds:

http://www.industryfunds.org.au

http://www.selectingsuper.com.au

Edited May 8, 2007 by Springbok

[sonnetjie]

The following links might be of interest

Superconcepts

Platinum

Navin Asset Management

[kangaroo]

I've been reading this thread out of interest and want to thank both Springbok and Bob for their valuable advice.

Thanks for the very informative outline of Allan Gray's options, Charl - you have a unique (very helpful) way of simplifying the vast amount of financial knowledge that the man on the street can grasp instantly without getting 'lost' in the financial terminology. Baie dankie!!

Bob, thanks for the mention of the 'commercial' vs 'industry' superfunds - this is priceless info! I will most definitely check this out before landing in Oz.

Much appreciated.

[TjaartvdW]

Guys, and Pippa

I can only agree with Kangaroo and thank you, as well as Mara on some of the other posts, for so freely sharing your Finance knowledge with us. I actually have a Bcompt degree and specialise in FICO in IT, but I must tell you that the admin around our local finances has become so complicated. We all need specialist advice for these kind of things.

Pippa, I'm in exactly the same situation as you, and have also on a previous occasion solicited these people's (personal) advice. The part about the super funds I have found invaluable (why is it called that, and not just 'valuable' ?)

I would however like to ask, especially to Springbok.. why would you take your money out/away from Allan Gray once you are able to join an Aussie super fund...? If AG has such high yield, then surely this could compensate for the loss in exchange rate, etc.. (the assumption here is that yield from Super funds in Aus are not as high as current AG yields in SA) - not sure if I've formulated this one correctly, but let's see

Thanks again

Tjaart

Edited May 8, 2007 by TjaartvdW

[Springbok]

I would however like to ask, especially to Springbok.. why would you take your money out/away from Allan Gray once you are able to join an Aussie super fund...? If AG has such high yield, then surely this could compensate for the loss in exchange rate, etc.. (the assumption here is that yield from Super funds in Aus are not as high as current AG yields in SA) - not sure if I've formulated this one correctly, but let's see

But would it compensate for all kinds of risk that Africa has?

Good question Tjaart, I've often thought about this myself... I am more than happy to leave my funds with AG until retirement, as they have consistently outperformed the JSE, the Dow Jones, inflation, loss in exchange rate, etc. over the longer term. BUT, as Bob has reminded us quite a few times on this forum, there are various risks attached to Africa (which South Africa is very much part of), e.g. political, currency, liquidity, regulation. Who could fathom 20 years ago in Zimbabwe that the country would be ruined economically today, with a worthless currency and inflation in excess of 2000%?

Say for example I have R100,000 invested with AG today and I am 30 years old. Let's assume I retire at age 55 and that my funds at AG grow at an average annual rate of 25%. Therefore when I retire in 25 years' time, my funds will be worth more or less R26.5 million (roughly R8 million in today's Rands, assuming constant inflation of 5% p/a). Current exchange control regulation limits South Africans to take only R2million offshore. What if there are still exchange controls in 25 years' time? Even if the limit is increased to, say, R10 million, I still won't be able to take the balance (R16.5 million) of my funds to Australia. Of course there won't be a problem if exchange controls have been completely abolished by that time, but this is Africa. I simply don't trust the government and don't want to take the chance of my retirement being spoiled by corrupt politicians.

So I'd rather pay some tax in 2 years' time, take all my funds to Australia and have peace of mind that I have eliminated African risk. I'd rather have 20% average annual growth in Australia, than 30% average annual growth in South Africa. Now to find an investment manager witb Allan Gray's credentials in Australia...

[DesertDaisy]

How do you actually arrange for your South African preservation/provident/retirement annuities to be paid into your Australian super? We've e-mailed our Super people, but still haven't had a reply. And what are the tax implications?

[Springbok]

How do you actually arrange for your South African preservation/provident/retirement annuities to be paid into your Australian super? We've e-mailed our Super people, but still haven't had a reply. And what are the tax implications?

I haven't done this myself yet, but I suppose the process is as follows:

1. Contact your fund manager (e.g. Allan Gray) who manages your funds and request a withdrawal. You will have to complete a redemption form.

2. You will pay tax (at your average marginal tax rate during the two years prior to your withdrawal), but I'm not sure who is responsible for that calculation... will find out and edit this post as soon as I have more information.

3. The fund manager will pay the proceeds into your S.A. bank account, from where you will have to send it to your Australian bank account.

4. From your Aussie bank account, you can then pay the funds into an Aussie superfund of your choice.

[DesertDaisy]

Can't I just transfer it directly, like you would transfer from a pension fund to a preservation fund?

[Springbok]

Can't I just transfer it directly, like you would transfer from a pension fund to a preservation fund?

No you can't - different countries, different rules.

SA has pension and provident schemes, Australia has superannuation schemes.

[DesertDaisy]

By the time you take the tax off, and then the loss in value on the currency exchange, its hardly worth it.

[Springbok]

By the time you take the tax off, and then the loss in value on the currency exchange, its hardly worth it.

maybe, maybe not... it's entirely up to you. Short term pain for long term gain. Refer to my earlier post about all the various risks attached to South Africa. Have you thought about how much MORE tax are you going to pay at your retirement? Or how much WEAKER will the Rand be against the AUD in future? The Aussie dollar trades at 1.6 to the Euro - the Rand at 9.4, that's already too much for my liking.

Say your pension is worth R10 million at your retirement and you want to send that to Australia to live from during your retirement. At the moment exchange control allows you to take only R2 million offshore - you can take the balance of R8 million as well, but you will be taxed 10% (or R800,000) first. Assume you take everything and pay the tax - your net proceeds = R10 million - R800,000 = R9.2 million / 5.85 = A$1.57 million.

But what if the Rand loses more value and trades at 10 vs. the Aussie dollar at your retirement date? Even if exchange control has been completed abolished by that time, your R10 million will then be worth R10 million / 10 = A$1 million, so you "lose" A$570,000 just because of currency depreciation. Even more if exchange controls remain in place.

So there are lots of uncertainties and each one of us has to make a lot of assumptions, no one can see the future. But we saw what happened in our neighbour Zimbabwe the last few years, I'm sure no one thought such devastation possible 20 years ago. I'm not saying the same will happen in S.A., but you'll have more peace of mind with all your funds in Australia, a first-world country without any exchange control. If you want to accumulate wealth, rather do it outside South Africa's borders.

[DesertDaisy]

We're thinking of cashing out the lot, bringing it over, and putting in straight into our bond. But we are still not on PR (we're on 457) so its all just discussion points at the moment.

[Pippa]

Dear Springbok, Bob and everyone that replied to my question,

Many thanks for your incredible advice ; I cannot tell you how much I appreciate it . I am very naïve when it comes to financial issues and you are real assets to this forum.

No doubt that I will ask still a few questions in the time to come and I hope you will be able to bear with me .

Thanks again, it is much appreciated !

Bye, Pippa! X

[woodag]

. . .

So there are lots of uncertainties and each one of us has to make a lot of assumptions, no one can see the future. But we saw what happened in our neighbour Zimbabwe the last few years, I'm sure no one thought such devastation possible 20 years ago. I'm not saying the same will happen in S.A., but you'll have more peace of mind with all your funds in Australia, a first-world country without any exchange control. If you want to accumulate wealth, rather do it outside South Africa's borders.

I very much agree with Springbok here. You don't even have to look elsewhere for examples of what may happen. Here is something you may find hard to believe - when I left SA the Rand was worth more than the Aussie dollar. Sure that was long ago, but how long is it until you retire?

[Springbok]

How do you actually arrange for your South African preservation/provident/retirement annuities to be paid into your Australian super?

Just got feedback from Allan Gray:

"Firstly we would require you to complete a Preservation Fund Withdrawal Form. Tax on your withdrawal would be as follows: You will have a tax free portion of R1,800 and the remainder of your money is taxed at the highest average tax rate paid by you in the tax year of your withdrawal or the preceding year. We request a Tax Directive from SARS. The proceeds is paid into your South African bank account, from where you can transfer it to your Australian bank account."

Edited May 15, 2007 by Springbok

[Russell]

Springbok is quite correct. On withdrawl after two years you will be taxed at the lowest marginal rate, currently 18%, in excess of the R1,800.

My conservative nature is currently toying with the idea of not even waiting for the two years to have lapsed before withdrawling my pension for that exact reason of the uncertainty of this country. Should we emmigrate this time next year, 2 years would take us to 2010 - plenty of time for someone like our dear old Mr Zuma (whom I beleive will be the next president of South Africa) and people under his influence to enact stricter exchange control and we could quite possibly end up unable to transfer any funds out. Also plenty of time for the rand to depreciate considerably.

What you save in tax by waiting 2 years vs cashing up and maximising our currency now can make a huge difference in the long term.

[Bob]

Boy oh boy!

I don't think I'd like to be in your shoes, wondering whether the political climate is going to lock your funds up in South Africa. I can imagine some gamblers would run the risk of taking the two years and only paying the the least marginal rate of tax on their funds, whilst others wouldn't sleep much in those two years worrying about their funds being locked up in S.A. due to political change.

If that is the case, you may actually be the lucky ones to have just "lost" touch with your retirement funds. How about those still living day to day there in those circumstances?

Anyhow . . . . . just a sweetener for you.

If you are permanently resident in Australia and have a super account taking the 9% of your wages / salary that the firm puts in for you, you can make voluntary contributions out of your own savings or after tax income . . . . . any money out of your personal savings, e.g. South African provident funds or bank account, or any pay that has already had Australian income tax taken out of it ("deducted") first.

You can stick any amount in you like to top up your super account, but on the first $1 000, the Australian gov't will give you a "top up" (tax free addition) of up to $1 500 each financial year.

If you have earnt under $28 000 before 30th June this year, you will get the full $1 500 top up on the $1 000 you contribute yourself to your super account.

You'll lose 5% for each and every dollar you earn over $28 000 each financial year, so that by the time you earn $58 000 a year, you won't be entitled to any top up.

Anyone, therefore, earning between $28 000 and $58 000 a year will get a partial top up depending on their earnings.

This is to help low income earners in Australia to take some responsibility for their own retirement income in the years ahead and help them to save in their superannuation funds for that time in their lives.

Last week's Australian Budget, announced by the Australian treasurer, will give a one-off doubling of the top up for those making voluntary contributions to their super accounts before 30th June 2007

This means, if you stick $1 000 in your super, you can earn up to $3 000 tax-free, as a top to your super account, if you earn up to $28 000 by 30th June 2007 and a pro rata double top up if earning up to $58 000

[DesertDaisy]

I spoke to our Superannuation people here in Australia, and they say that it IS possible to transfer our funds from our RAs/Protector packages directly into our Super here.

It requires a great deal of paperwork, but it is possible. Talk to your Superannuation people in Australia.

[woodag]

. . .

Last week's Australian Budget, announced by the Australian treasurer, will give a one-off doubling of the top up for those making voluntary contributions to their super accounts before 30th June 2007

. . .

That is what I thought at first too, but unfortunately it is on contributions in the 2005-2006 tax year - too late and too bad if you did not make any contributions in that year.

[Springbok]

My conservative nature is currently toying with the idea of not even waiting for the two years to have lapsed before withdrawling my pension for that exact reason of the uncertainty of this country.... What you save in tax by waiting 2 years vs cashing up and maximising our currency now can make a huge difference in the long term.

I think things will remain relatively stable until at least the Soccer World Cup in 2010, so personally am not too worried about too much Rand depreciation or political interference until after that event. But let's put this in numbers anyway, using the following assumptions:

- Your current maginal tax rate in SA = 40%

- You emigrate in January 2008

- Your age is 30 in Jan. 2008

- Your age is 32 in Jan. 2010

- You retire at age 60 in Jan. 2038

- Pension in Jan. 2008 = R100,000

- ZAR/AUD in Jan. 2008 = 6.0

- ZAR/AUD in Jan. 2010 = 7.5

Scenario 1 - leave pension invested (at 10% p/a) in SA for 2 years, then transfer to Aus:

Start with R100,000 in 2008

This grows to R100,000 * 1.1 * 1.1 = R121,000 in 2010

Tax payable = (R121,000 - R1,800) x 18% = R21,456

Net proceeds = R99,544 / 7.5 = A$13,273

Invest in Aussie super for the next 28 years at average 10% p/a

Retirement capital = A$13,273 * (1.1^28) = A$191,403

Scenario 2 - withdraw pension immediately and transfer to Aus:

Withdraw R100,000 in 2008

Tax payable = (R100,000 - R1,800) x 40% = R39,280

Net proceeds = R60,720 / 6.0 = A$10,120

Invest in Aussie super for the next 30 years at average 10% p/a

Retirement capital = A$10,120 * (1.1^30) = A$176,588

Edited May 15, 2007 by Springbok

[Pixi]

All very smart and well, except tax on pension withdrawal does not get paid on marginal tax rate, but on highest average tax rate for last 2 years . Even if you are lucky enough, and earn a taxable income of million rand a year - your average tax rate will only be 34,3 %. On R500,000 average tax is 28,6% and on R250,000 average tax is: 20,1%. And if you start to compare 20 % to 18% , and 40% to 18% - it will influence your decision.

[Russell]

Pixi beat me to the punch on that response and you are quite right. If you look at the 2007 RSA tax tables, a person earning R100,000 above the maximum threshhold of 40%, will only an average tax rate of around 31%. Factor that into Spingboks calculation above and you get the following:

Scenario 1 - leave pension invested (at 10% p/a) in SA for 2 years, then transfer to Aus:

Start with R100,000 in 2008

This grows to R100,000 * 1.1 * 1.1 = R121,000 in 2010

Tax payable = (R121,000 - R1,800) x 18% = R21,456

Net proceeds = R99,544 / 7.5 = A$13,273

Invest in Aussie super for the next 28 years at average 10% p/a

Retirement capital = A$13,273 * (1.1^28) = A$191,403

Scenario 2 - withdraw pension immediately and transfer to Aus:

Withdraw R100,000 in 2008

Tax payable = (R100,000 - R1,800) x 31% = R30,442

Net proceeds = R69,558 / 6.0 = A$11,593

Invest in Aussie super for the next 30 years at average 10% p/a

Retirement capital = A$11,593 * (1.1^30) = A$202,290

Someone earning below R400,000 per annum, the number get even bigger.

It makes a difference! But everything looks good on an Excel spreadsheet and there are so many factors that influennce the numbers that people reading this post must not take any advice as sound. Things could change ie: it is quite possible that there will be a market slow down globally and one would only get a 5% growth over the next 2 years in Australia on Super funds.