Edition Two
November 2011
Author: Tania Theron
Retirement savings vehicles –
Do you understand the difference?
We often see articles urging us to save for retirement in order to live a
comfortable life the day we retire. Do investors really understand the various
retirement fund options which are available to them and how they each differ?
Some investors do, some investors simply appoint financial advisors that can
guide them in the right direction, but most investors do not have adequate
insights into the optimal retirement strategy. This article will empower you
with valuable information regarding the most frequently used retirement fund
savings vehicles available in the industry.
The purpose of retirement savings vehicles is to provide employees or selfemployed individuals and their dependents with an income after retirement.
The different types of retirement savings vehicles available to investors are:
1. Provident Funds,
2. Pension Funds,
3. Retirement Annuity Funds,
4. Preservation Funds, and
5. Life and Living Annuities.
The main difference between these retirement savings vehicles is how you
receive the fund benefit at retirement and thereafter and the tax treatment
thereof. In most cases, investors can via all these retirement savings vehicles
invest in the same underlying investment products (Some pension and
provident funds might have specific fund rules regarding their investment
products). It is therefore just the vehicles that differs. This means that whether
you contribute towards a pension fund or a retirement annuity, your
underlying investment product or solution can be exactly the same.
Below is a description of each retirement savings vehicle, their differences
and similarities. We hope the overview empowers you to make more informed
investment decisions for your nearing retirement.
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PROVIDENT FUND
Edition Two
November 2011
“You are allowed to
withdraw the full savings
in cash before or at
retirement
from
a
provident fund, whereas
with a pension fund, the
maximum cash withdrawal
allowed before or at
retirement is restricted to
one third of your savings.”
1. What is a provident fund?
 A provident fund is a savings account comprised of contributions
made by you during your working years, in addition to the
contributions made by your employer. The monthly contribution is
calculated as a percentage of your salary.
 There has to be an employer-employee relationship.
2. Retirement Age:
 >55 subject to rules of the fund, or earlier in case of disability.
3. Lump Sum Withdrawals:
 The total value can be withdrawn at retirement, permanent
disability, death, resignation or retrenchment (e.g. before
retirement).
4. Tax Implications:
 None of the current or arrear contributions are tax deductible for
the employee.
 The employer may deduct 10% of the approved remuneration but
in practice up to 20% is allowed.
 Retirement benefit: Upon retirement, commutation of any
annuity, retrenchment or death, the first R315,000 is tax free
(plus any contributions which did not previously qualify as a
deduction less any lump sums previously allowed).
The taxable portion of the lump sum is calculated as follows:
Taxable Income (R)
0 - 315 000
315 001 - 630 000
Rate of Tax (R)
0% of taxable income
18% of taxable income
630 001 - 945 000
945 001 and above
R 56 700 + 27% of taxable income
R141 750 + 36% of taxable income
 Withdrawal benefit (e.g. withdrawal, divorce or transfer): the tax
free portion is R22,500.
The taxable portion of the withdrawal benefit is calculated as
follows:
Taxable Income(R)
0 - 22 500
22 501 - 600 000
Rate of Tax (R)
0% of taxable income
18% of taxable income
600 001 - 900 000
900 001 and above
103 950 + 27% of taxable income
184 950 + 36% of taxable income
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Edition Two
November 2011
There are indications that provident funds might disappear in the future. The
reason is that the main attraction of a provident fund, namely to be able to
make a 100% lump sum withdrawal at retirement, will no longer be available
to investors. All future contributions will be subject to a maximum withdrawal
of one-third, as is the case with pension funds and retirement annuities.
“A survey of 1 000
working metro households
showed that 62% of
respondents had funeral
policies. However, only
46% were members of
pension or provident
funds and only 27% had
retirement
annuities
(RAs), while 45% had no
pension, provident fund or
RA provision at all.”
PENSION FUND
5th Edition of Old Mutual
savings and investment Survey.
3. Lump Sum Withdrawals:
 1/3 of the total savings value may be withdrawn on retirement or
in the case of permanent disability.
 If the total value of all retirement benefits per pension fund is less
than R75 000, the full amount may be withdrawn as a lump sum.
 The balance (i.e. the other 2/3 of the total savings value) must be
used to purchase a life or living annuity.
 The total savings value can be withdrawn at death or resignation,
retrenchment, winding up of the fund or dismissal.
1. What is a pension fund?
 A pension fund is a retirement savings pool established by an
employer. You, as the employee, as well as your employer
contributes to this savings pool. These accrued contributions will
provide you with an income (a pension) once you reach
retirement age.
 There has to be an employer-employee relationship.
2. Retirement Age:
 >55 subject to rules of the fund, or earlier in case of disability.
4. Tax Implications:
 Current pension fund contributions by the employee may be
deducted to the greater of 7,5% of remuneration from retirement
funding employment, or R1 750.
 Any excess may not be carried forward to the following year of
assessment.
 A maximum of R1 800 per annum may be deducted as arrear
pension fund contributions by the employee.
 The employer may deduct 10% of the approved remuneration but
in practice up to 20% is allowed.
 The tax on lump sums at retirement, disability, death and
withdrawals at resignation or retrenchment is exactly the same
as provident funds.
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RETIREMENT ANNUITY (RA)
Edition Two
November 2011
“A retirement annuity (RA)
allows investors the
flexibility to contribute on
a regular basis, to
interrupt contributions for
a period and to stop
contributions at any stage.
Some life companies
might charge a penalty for
stopping
the
contributions.”
1. What is a retirement annuity?
 An RA is a long term investment tool used by self-employed
investors. You may contribute monthly or in lump sums until you
reach retirement.
 RAs can also be used by employed persons as a supplement to
their pension and provident fund contributions.
 No employee-employer relationship exists.
 As an RA does not make monthly, quarterly or annual payouts,
on retirement, you have a choice to transfer your savings to a
guaranteed life annuity (an annuity that provides income for life)
or a living annuity. By choosing a living annuity you can manage
the income you receive (between 2.5% and 17.5% of the savings
amount each year).
 The cash benefit from a RA falls outside your estate, so for
example, if you die and are insolvent, your benefit is paid to your
family rather than your creditors.
2. Retirement Age:
 >55, except in case of disability it can be before age 55. Fund
rules can determine maximum age.
3. Lump Sum Withdrawals:
 1/3 of the total savings value may be withdrawn on retirement or
in the case of permanent disability.
 If the total savings value of all retirement benefits per retirement
annuity is less than R75 000, the full amount may be taken as a
lump sum.
 The balance (i.e. the other 2/3 of the total savings value) must be
used to purchase a life or living annuity.
 Withdrawals (e.g. retrenchment or resignation or winding up of
the RA fund or dismissal) before age 55 is not allowed, unless
the paid up value is less than R7 000.
4. Tax Implications:
 Current RA contributions by the employee are tax deductible to
the greater of
• 15% of non-retirement fund income, or
• R3 500 less allowable pension fund contributions, or
• R1 750.
 Any excess (e.g. contributions above 15% of non-retirement fund
income) may be carried forward to the following year of
assessment.
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Edition Two
November 2011
“A transfer from a
preservation fund to an
RA fund is not allowed.
However, a transfer
from a pension or
provident fund to a RA
is allowed”
 The tax on lump sums at retirement, disability, death and
withdrawals at resignation or retrenchment is exactly the same
as pension and provident funds.
 RAs are currently not subject to Capital Gains Tax.
 Interest and dividends are not taxed within a RA.
 On death, any benefits paid out by way of RA or lump sum are
free of estate duty.
 The tax implication for government employees are different and
are not set out in the article.
PRESERVATION FUND
1. What is a presevation fund?
 Few individuals remain with the same employer for the whole of
their career. If you resign or are dismissed, you may transfer your
provident or pension fund benefit to a preservation fund. These
vehicles are specifically designed to safeguard your retirement
savings.
 Members of pension funds must transfer to a pension
preservation fund and members of provident funds to a provident
preservation fund.
 No additional contributions are allowed to payments to
preservation funds.
 When retiring from a preservation fund, legislation requires that
at least two thirds of your retirement savings be invested in a
living annuity or a life annuity.
2. Retirement Age:
 You can retire from a preservation fund at any age after 55 (no
maximum age) regardless of the transferring fund’s retirement
age.
3. Lump sum Withdrawals and Tax Implications:
 The same rules regarding lump sums, taxable and tax free
portions apply as for pension and provident funds depending on
which fund the member belonged to.
 I.t.o disability, if a member has reached 55 years, he may
become entitled to a retirement benefit from the preservation
fund, even though he is still employed.
 Exempt from dividends tax which comes into effect 1 April 2012.
 Transfers are only allowed on retrenchment, resignation,
dismissal or winding up of the fund – not on retirement.
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LIVING AND LIFE ANNUITIES
1. What is a living of life annuity?
Edition Two
November 2011
“Advantages:
Flexibility. You decide
where to invest your
money and you choose
your own level of income.
Disadvantages:
You carry the risk of poor
market performance –
there are no guarantees.
There is a risk of outliving
your savings i.e. longevity
risk. This is the risk of
living much longer than
expected and drawing too
much income early on.”
 When retiring from a pension / provident fund, a preservation
fund or an RA, legislation requires that at least two thirds of your
retirement savings be invested in a retirement savings vehicle
such as a living annuity or a life annuity.
 The main differences (Source: Securewealth) between a living
annuity and a life annuity are as follows:
 Your beneficiaries can continue to receive the benefits
due under your living annuity on your death. In the case
of the life annuity payment of benefits ceases on your
death, or if you so arrange it, the death of your spouse.
 You are allowed to change the level of income you
receive from a living annuity once a year (a minimum of
2.5% and a maximum of 17.5%) to suit your particular
circumstances whereas the annual income paid from a
life annuity is fixed or escalates at a fixed rate every
year.
 With a living annuity, your annual income as well as any
capital your dependants may receive at your death
depends on the growth (positive or negative) realised on
the savings in your living annuity. The growth on your
capital is not guaranteed and fluctuates with the
markets. With a life annuity you receive a guaranteed
income until death.
 With a life annuity the benefits that you receive for the
remainder of your life is determined by interest rates at
the time of your retirement. If inflation increases
significantly during the remainder of your life, your
benefits will be severely eroded.
2. Retirement Age:
 One can opt to invest in a living annuity from the age of 55.
3. Lump Sum Withdrawals:
 Lump sum withdrawals are not allowed.
4. Tax Implications:
 Capital withdrawals you receive until death might be taxed
according to your marginal tax rate (SARS tax tables) if it was
not previously taxed under a pension, provident or an RA
withdrawal.
 Exempt from dividends tax which comes into effect 1 April 2012.
 The interest portion will be taxed on withdrawal accordingly to
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your marginal tax rate.
NEW DEVELOPMENTS
Edition Two
November 2011
“The Institute of Retirement
Funds
submits
that
retirement funds play a
primary role in savings as it
is the most important
savings vehicle for the
majority of retirement fund
members
or
formally
employed citizens in South
Africa. Therefore the IRF
supports the policy that all
changes to retirement funds
should
stimulate
and
encourage the savings
culture of retirement fund
members .”
The following proposals were raised in the February 2011
Budget Speech but were not dealt with in the draft Taxation
Laws Amendment Bill (TLAB) 2011 and have still not been dealt
with in the final TLAB:
• Employees will face a "fringe benefit tax" on company
contributions to their pension and provident funds.
• 22.5% (see details below of what is currently allowed) of
your income for contributions may be allowed as a deduction
to pension, retirement annuity (RA) and provident funds.
This means that you may get a lot more tax back if you
increase your retirement savings.
• The maximum tax saving on contributions will be reached
when the person’s taxable income, including the employer’s
contribution as a taxable fringe benefit, reaches R888 889
because government is putting a cap of R200,000 on
contributions deductibility.
SUMMARY
The South African Government is not only protecting individual’s
retirement savings by restricting their lump sum withdrawals but
also giving them preferential tax rates when they retire, e.g. the
tax threshold for age 75 years and older are R104 261, for 65 to
below 75 it is R93 150 compared to the R59,750 for below 65.
We want to encourage you to get actively involved in managing
your retirement savings. Contact your financial advisor to assist
in determining the best vehicle for your retirement savings.
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