Provident Fund

[Springbok]

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...

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.

Quite right, thanks pixi and Russell! and of course everyone should do their own calculations based on their own unique circumstances...

[Springbok]

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.

Everyone - the withdrawal and tax rules are current as follows:

Retirement Annuities (RAs):

The capital in a retirement annuity cannot be withdrawn prior to retirement.

At retirement, a maximum of 1/3 of your capital in the retirement annuity can be taken as cash. Of this cash amount, the greater of R120,000 or R4,500 times the years of contributory membership of a retirement annuity, can be taken tax-free. The remainder of the cash is taxed at the higher of the average tax rate paid by you in the tax year of your retirement or the preceding year.

The balance of at least 2/3 of the capital must be invested in a pension-providing vehicle such as a living annuity or a guaranteed life annuity. No tax is payable on the transfer into the living annuity. The annual pension received after retirement is taxed at your marginal tax rate. Your marginal tax rate after retirement is typically lower than your marginal tax rate before retirement.

Pension Preservation Fund:

It allows for a single withdrawal of any portion (up to 100%) of the capital in the fund prior to retirement.

At retirement, a maximum of 1/3 of your capital can be taken as cash while a minimum of 2/3 must be used to purchase a pension-providing vehicle such as a Living Annuity.

Provident Preservation Fund:

It allows for a single withdrawal of any portion (up to 100%) of the capital in the fund prior to retirement.

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.

So if you have a Retirement Annuity, there is nothing you can do - those funds are stuck in S.A. until your retirement age (usually 55). Only then will you be allowed to withdraw a portion of your capital (provided the rules remain unchanged).

However if your have a Pension or Provident Fund, you still have the option of withdrawing 100% of your funds and send it to Australia. But you have to make haste, as the tax rules are going to change soon and close this loop-hole. In an Allan Gray newsletter of 22 March 2007, the following:

"If the latest proposals from government on retirement funding are adopted, employees will no longer be able to cash-out their pension or provident fund benefits when leaving an employer. The Second Discussion Paper on Social Security and Retirement Reform published by the Department of National Treasury in February calls for the abolition of this practice."

Indeed, refer to paragraphs 110 and 11 of The Second Discussion Paper on Social Security and Retirement Reform:

110. Currently, pension funds are able to pay up to one-third of a retirement benefit in the form of a lump sum, with exceptions from this limit for amounts below a certain threshold. No restrictions currently apply to benefits received from provident funds.

111. With the proposed standardisation of regulatory and tax treatment of all forms of retirement funds, it is proposed that a consistent approach be applied to the payment of retirement, death and disability benefits by pension, provident and retirement annuity funds. Regulations should allow for the payment of a modest proportion of the benefit in the form of a lump sum, with the balance being used to secure a conventional annuity, except for benefit values below a certain threshold. Transitional arrangements will be necessary in the case of provident funds.

In addition, on withdrawal we are going to be taxed at the highest average tax rate of ANY year of assessment prior to the year of withdrawal, not just the preceding 2 years. So leaving your funds for another 2 years is not going to be of any benefit anymore. Refer to the Income Tax Act and the Pension Tax Amendments, most of which come into operation on 1 October 2007.

[kazo]

Just another thought in here.

If you take your capital out of a provident fund, pay the tax in SA, transfer the cash to Aus and then into a super, arent you going to pay tax on it again when you retire in aus?

[Springbok]

Your capital (brought over from SA) transferred into an Aussie super fund is after-tax capital. Remember the capital originally contributed to your provident fund in SA, came from pre-tax earnings, that's why you were taxed when you withdrew the funds.

Just another thought in here.

If you take your capital out of a provident fund, pay the tax in SA, transfer the cash to Aus and then into a super, arent you going to pay tax on it again when you retire in aus?

[kazo]

Your capital (brought over from SA) transferred into an Aussie super fund is after-tax capital. Remember the capital originally contributed to your provident fund in SA, came from pre-tax earnings, that's why you were taxed when you withdrew the funds.

I am aware of that but the question remains, how is a super taxed upon retirement, if at all? If it is then you would be taxed twice?

[woodag]

I am aware of that but the question remains, how is a super taxed upon retirement, if at all? If it is then you would be taxed twice?

Aussie superannuation rules are forever changing, which in itself is something you have to be aware of.

With the superannuation rules that come into effect next month, you would pay no tax, either on a lump sum benefit, or an income stream, if you are over 60 years of age. If you are under 60 years of age it is a lot more complicated, but due to the "preservation" rule, you probably won't be able to get hold of anything out of your superannuation until you are 60 anyway (at least, not unless you were born before 1964).

One of the hazards is that nobody can tell you what the rules will be when you retire in <insert your own number> years time.

Edited June 12, 2007 by woodag

[Oryx]

So if I understand correctly there is not any benefit anymore in leaving the funds for 2 years and if I have a retirement annuity I should make that paid up as soon as possible as I will only be able to get 1/3 at retirement and the rest has to stay in RSA (under current legislation)

[Springbok]

So if I understand correctly there is not any benefit anymore in leaving the funds for 2 years and if I have a retirement annuity I should make that paid up as soon as possible as I will only be able to get 1/3 at retirement and the rest has to stay in RSA (under current legislation)

I left 8 months ago and the Rand has already depreciated 15%. Imagine where the Rand will be in 2 years' time, given the situation with Eskom (and now apparently water too!). So not worth it in my opinion.

With RAs you don't have a choice - you'll get the 1/3 cash on/after your 55th birthday while the remaining 2/3 will be paid out as a monthly pension. The only thing you can do now, is to stop your RA contributions - just check that they don't hit you with absurb penalties for "early termination". The Pension Funds Adjudicator should be able to help you out if they do. You'll find a couple of determinations at http://www.pfa.org.za/site/index.asp. Study the following two examples of De Sousa and Du Plessis, both vs. the Liberty Lifestyle RA:

[Oryx]

Thank you Springbok! Your contributions are much appreciated.

[Lynn]

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

Hi Pippa

I am a financial planner in SA - do yourself a favour - get your money out. If your tax rate is 35% (e.g.) waiting 2 years will bring it down to 18%. That is 17% difference. No calculate this:

1. Depreciation in the Rand expected over the next two years - work on 14%;

2. Costs to go into a preservation fund - they all say there are no costs - how the hell do they get paid - there are costs. Your underlying investment portfolio returns much less, and that is the costs;

3. Add your return that you could get in SA over two years in a conservative portfolio - Allan Gray Stable - at 11%;

4. Take away the opportunity cost of the funds going to Aus and earning interest or growth in A$ or being invested in property there;

5. Take away the growth in property in Aus.

Then tell me what you get - I think you will find that the funds should go with you to Aus. But do this exercise. Depending on what you intend to do with the funds overseas, is dependant what the loss or gain will be.

k.rgdfs

Lynn

[Lynn]

Hi Pippa

I am a financial planner in SA - do yourself a favour - get your money out. If your tax rate is 35% (e.g.) waiting 2 years will bring it down to 18%. That is 17% difference. No calculate this:

1. Depreciation in the Rand expected over the next two years - work on 14%;

2. Costs to go into a preservation fund - they all say there are no costs - how the hell do they get paid - there are costs. Your underlying investment portfolio returns much less, and that is the costs;

3. Add your return that you could get in SA over two years in a conservative portfolio - Allan Gray Stable - at 11%;

4. Take away the opportunity cost of the funds going to Aus and earning interest or growth in A$ or being invested in property there;

5. Take away the growth in property in Aus.

Then tell me what you get - I think you will find that the funds should go with you to Aus. But do this exercise. Depending on what you intend to do with the funds overseas, is dependant what the loss or gain will be.

k.rgdfs

Lynn

Sorry saw the balance of your e-mail - Orbis is an offshore investment. In your preservation fund you are limited to 15% going into offshore. Balance to remain in SA.

Speak to a fin advisor that you can trust - what area are you in - I will refer you to someone in your area?

krgds

Lynn

[WouterG]

Hi Lynn,

I am sitting in the same predicament. I have a few bucks in my pension and provident fund.

If I leave it here for 2 years would I have to pay tax on the OZ side. Is OZ a resident based tax system as we are?

I am no financial expert but don't you pay tax where you reside?

Does OZ and ZAF have a system whereby you dont get double taxed if you pay your taxes here and take money across after 2 years ?

We are going to invest my pension / provident money in property once in OZ. That is the reaon why I would like to take as much as possible across.

[Antoinette]

You now get taxed on your income for the preceding 5 years and not 2 years. I know as I have just withdrawn my pension money from a preservation fund and had to provide my income for the preceding 5 years.

also

It is very probable that new legislation will be accepted in the near future that will prevent people from withdrawing their pension money befor retirement. Then it is stuck in SA until you retire.

[Lynn]

Hi Lynn,

I am sitting in the same predicament. I have a few bucks in my pension and provident fund.

If I leave it here for 2 years would I have to pay tax on the OZ side. Is OZ a resident based tax system as we are?

I am no financial expert but don't you pay tax where you reside?

Does OZ and ZAF have a system whereby you dont get double taxed if you pay your taxes here and take money across after 2 years ?

We are going to invest my pension / provident money in property once in OZ. That is the reaon why I would like to take as much as possible across.

Hi WouterG, as I understand the Aus tax system, it is residency based. However, for the purposes of income tax in Aus, you will not pay income tax on a pension or provident fund - I can check this out for you to be 100% sure, but have seen nothing to indicate that there would be tax there on this.

I am sure there we have double taxation agreements with Aus. Remember that if you are resident in Aus, then you don't pay tax in SA and for the purposes of that year, you will be non resident in SA. If you take the funds out of the preservation fund in SA, you are taxed in SA, and the capital that goes across to Aus is of a capital nature - therefore, no income tax on it. When you invest it in Aus, then there is tax on it.

I am still checking out the differences between temporary resident and perm residency VISAs as from a tax point of view there are differences.

What are you - temp or perm res in Aus?

Maybe a tax expert in Aus can help us with this query ...

Thanks Lynn

[Lynn]

You now get taxed on your income for the preceding 5 years and not 2 years. I know as I have just withdrawn my pension money from a preservation fund and had to provide my income for the preceding 5 years.

also

It is very probable that new legislation will be accepted in the near future that will prevent people from withdrawing their pension money befor retirement. Then it is stuck in SA until you retire.

Hi Antoinette, one portion of the calcualtion is the HAAS (Highest Annual Average Salary) for the last 5 years - but you are not taxed on the last five years. It is only one portion of the calc. Are you over 55?

I am not sure of your second paragraph and where this comes from and how reliable the information is, as this is the first time I have heard it. At the moment, you cannot move from a pension fund anyway, it needs to be transferred to a pension preservation and only then can the one withdrawal be taken out.

Lynn

[Antoinette]

Hi Lynn

No, I am younger than 55. Re. the possibility of said legislation. My source of information was Alan Gray investment company more than a year ago. Thanks for the info.

Antoinette