Transfer: Provident fund to RA

[RisseN]

Hi All,


In a few months I will begin working for myself as apposed to a company. I therefore need to transfer my provident fund into some other kind of investment vehicle. It seems like a retirement annuity makes the most sense (although im still busy researching this).

I do however have a few questions:

- If you move from one employer to another and transfer your provident fund to the new company, there are no tax implications. But in my case I will no longer be working for anyone else and need to transfer the provident fund to a retirement annuity. Are there any tax implications? (I would think not, but I haven't been able to find any info on this)

- How does the tax break work? I wont be earning a fixed value salary, it will vary from month to month. So im just wondering if the tax break is based on my salary (which will vary from month to month) or based on how much I contribute?
For example if I were to contribute R1 000 to the RA monthly (after the intial lump sum transfer), then how does the tax break work?

- I already have money invested in an Old Mutual unit trust which I contribute to monthly. It has a 10 year lifespan and will mature in 2018. I do not however plan on using an Old Mutual RA. Will the fact that I have a unit trust and a separate RA affect me at all in terms of tax? Obviously I will be taxed in 2018 when the Old Mutual Unit trust matures, but im talking about in the interrim (again, I would think not but just throwing this out there to check)

Thanks, much appreciated

 

[BigAl-sa]

Speak to an investment advisor who is independent of the insurance companies. Your unit trust investment sounds like you were conned into an insurance type investment. A unit trust investment can be cashed in at any time.

 

[RisseN]

Thanks for the reply. Yes I do plan on speaking to an advisor but im just doing a bit of research before hand.

The unit trust can be cashed in anytime, but there is a penalty fee I think (I haven't really looked into that aspect because I have no intention of cashing in).

 

[Freshy-ZN]

You can transfer the funds in your Provident Fund to either a Preservation Fund or an RA. Taking any lump sums will incur tax liabilities as well as use up some of your tax free lump sum at retirement. It would probably make sense (would need to run the numbers)to do the Preservation fund and then start a new RA. The new RA will serve two purposes- it will continue your contributions to your retirement as well as give you some tax relief on income going forward.

The tax breaks you asked about, in simple terms, work like this- Assuming that once you go on your own you will no longer be contributing to a pension or provident fund then currently you will get relief on up to 15% of your income. In other words to take full advantage of the tax breaks then contribute 15% of what you earn to an RA. If you earn an irregular income then assume the lowest monthly income likely and work on that. When you do earn more then you can make ad hoc payments to your RA (min R2500 usually) as and when. At the end of the tax year you can then confirm your annual earnings and make a final contribution if possible. People dont do this very often and they lose out.

Rather start an RA with an amount that is more likely to be sustainable in the long term than overdo it from the start and risk lapsing policies because you were too optimistic.

 

[RisseN]

I received some feedback from one of the potential RA's i've been looking into. They advised that I would have to open two separate RA's. One for the transfer of my current company provident fund, another for the monthly debit which I will setup. Does that sound right?

Basically they advised that due to reporting and tax issues, you cant have compulsory funds (aka: transfer from the provident fund) and voluntary funds in the same RA.

Anyone heard of that before?

 

[Rkootknir]

I received some feedback from one of the potential RA's i've been looking into. They advised that I would have to open two separate RA's. One for the transfer of my current company provident fund, another for the monthly debit which I will setup. Does that sound right?

Basically they advised that due to reporting and tax issues, you cant have compulsory funds (aka: transfer from the provident fund) and voluntary funds in the same RA.

Anyone heard of that before?

Sounds like a lazy company or one with crap admin. It is true that a provident fund transfer to a retirement annuity is a bit more complicated than a pension fund transfer to a RA (a RA is basically seen individual pension fund). As far as I know the rest of this post is accurate but be sure to ask a proper (independent) financial advisor about it as well.

Was you provident fund contributions member contributions, employer contributions or a mix? Member contributions to a provident fund are made after tax so you will be able to make a tax deduction on them when you eventually withdraw from the provident fund. On transfer to a RA the administrator of the RA has to mark any member contributions from a provident fund as post-tax - any new contributions to the RA will be pre-tax because you get a tax deduction on your contributions to a RA. The employer contributions are a non-issue as your employer would have received a tax deduction on them regardless of whether it is a pension or provident fund - so they're always deemed pre-tax in your hands.

A transfer like this complicates the admin of the RA (and the tax handling of any payout from the RA) a bit, but any moderately competent financial services company should be able to handle it. If they force you to split it make sure that they are not just trying to double the administration fees and commissions.

 

[RisseN]

Thanks for the reply. Yes it sounds strange to me as well which is why im questioning it. (By the way, it is Allan Gray that I was in contact with via email)

Personally I dont see why I cant just transfer my provident fund to an RA and then start contributing to it monthly. I will be self employed so what's the problem?

 

[Freshy-ZN]

Thanks for the reply. Yes it sounds strange to me as well which is why im questioning it. (By the way, it is Allan Gray that I was in contact with via email)

Personally I dont see why I cant just transfer my provident fund to an RA and then start contributing to it monthly. I will be self employed so what's the problem?

You can, find a decent advisor/company.

 

[BTTB]

If you have R1Million or more currently, consider a Personal Share Portfolio administered by PSG/Momentum.
You will not find this investment vehicle openly advertised.