Benefits to keeping retirement savings in a preservation fund
They are still appealing despite new options now available
There are good reasons for preserving your retirement savings in a preservation retirement fund despite the competing options now open to you when you change jobs.
Recently introduced regulations under the Pension Funds Act are likely to result in more members preserving their retirement savings in employer-sponsored and umbrella funds that should have lower costs than preservation funds and retirement annuities available to individuals.
Within 18 months of the regulations taking effect on September1 last year, retirement funds are required to preserve your savings in your fund and only pay you out or transfer your savings to another fund if you request it.
With "in-fund preservation" and the ability to transfer your savings to a new fund you may join - known as "portability" - you potentially have four options for preserving your retirement savings.
In addition to this competition to preservation funds, tax law amendments aimed at aligning the incentives that savers in pension and provident funds enjoy could take away the need for separate pension and provident preservation funds.
Access to cash
Preservation funds have, however, always had a trump card over the arguments for preserving in-fund or in an RA.
Preservation funds allow you to take part of your retirement fund benefit as cash - after you pay the tax - and then transfer the balance tax-free to the fund. You are then allowed to make one further withdrawal - either part of your savings or all of it - from that fund before retirement.
If you transfer your savings to an RA, your savings must be transferred in full and then you cannot access them until at least age 55, unless you take early retirement for ill-health, or emigrate.
If you preserve your savings in the employer-sponsored or umbrella fund of an employer you are leaving and need to access that money later, you can probably at that stage transfer to a preservation fund that allows a partial withdrawal, says Anton Swanepoel, legal adviser at Sanlam.
Janet Hugo, an independent financial adviser at Sterling Private Wealth, says the access to your savings that preservation funds provide is an important factor because you never know when you'll need cash.
Steven Nathan, CEO of retirement fund provider 10X, says members in a pension preservation fund can withdraw before retirement and avoid being forced to buy a pension with two-thirds of the money at retirement. This does, however, entail paying the higher tax on the withdrawal and giving up the security of income that being forced to buy a pension will probably give you.
Another advantage of the preservation fund is you can transfer the balance of your savings back to an employer fund, even after you have made the one withdrawal.
Hugo says preservation funds on investment platforms are often more transparent about underlying investments and costs than employer-sponsored and umbrella funds. The lack of transparency makes it difficult for advisers to provide you with accurate performance comparisons for your choices.
The disclosure of umbrella fund costs is not yet standardised, but the Association for Savings and Investment South Africa plans to oblige its member companies to disclose an effective annual cost for these funds.
No further contributions: The big drawback of the preservation fund is that it does not allow for you to continue contributing to the fund, Nathan says. This is also true for preserving in the employer-sponsored fund of an employer you are leaving.
If you want to keep saving through a retirement fund after leaving formal employment - if, for example, you open a business or do contract work or want a deduction against passive income such as rental income or an annuity - you would have to do so through an RA, Nathan says.
This would give you the ability to deduct your contributions from your taxable income or remuneration up to 27.5% of that income or remuneration (whichever is higher) but limited to R350 000 a year.
Emigration: Currently if you transfer your savings to a preservation fund and later decide to emigrate, you probably won't be able to access your savings until retirement age, Nathan says. If the balance in your pension preservation fund is above R247 500 you would have to leave your money in the South African fund and at retirement age buy an annuity with two-thirds of your savings in the fund, Nathan says.
You can avoid this by transferring your preservation fund savings back to an employer fund or an RA, as savings in these can be accessed on emigration. But this disadvantage mayfall away. The National Treasury's Budget Review notes the government's intention to bring the treatment on emigration of savings in a preservation fund in line with that of RAs.
Hugo says an advantage of a preservation fund is that having two funds allows you to retire from the funds at different dates.
Staggering your retirement from different funds could also be beneficial if the tax exemptions on lump sums taken at retirement are increased, as they were from R350 000 to R500 0000 a few years ago.
Retirement funds are an excellent estate planning tool and not subject to capital gains tax, income tax and estate duty, Hugo says.
Last year the Pension Funds Act was amended to allow you to transfer your savings in a pension or provident fund to an RA after your retirement date. This was also to encourage you to postpone your retirement if you can work after retirement.
Transfers to pension preservation and provident fund preservation funds were excluded, but in the Budget Review, the Treasury says it plans to cater for these transfers in future legislative amendments.
It is likely that you will be denied the one-time withdrawal of savings transferred to a preservation after retirement, says Kobus Hanekom, principal consultant at Simeka Actuaries & Consultants, the retirement fund consultants in the Sanlam group.
However, being allowed to transfer to a preservation fund after retirement will ensure you are not trapped in a retirement fund with "in-fund options" that do not compare favourably with what RA and preservation funds have to offer, he says.
What to look for when you decide to preserve
Umbrella funds are likely to encourage you to keep your savings in the fund even if you leave the employer that is participating in the fund. They are therefore likely to come up with competitive offerings, but it is important to remember members may still move if they are unhappy with the funds, says Daniel van Andel, a manager in Allan Gray's product development team.
Umbrella funds cater for multiple employers in a single fund and are often sponsored by financial institutions.
It remains to be seen to what extent standalone employer-sponsored or occupational funds will embrace the new regulations under the Pension Funds Act requiring them to put certain defaults in place - if they will put forward attractive in-fund preservation options or guide members to outsourced preservation funds, he says.
Employer-sponsored retirement funds have in the past not been required to keep track of and administer your benefits after you resign. The extent to which these funds promote this in future will depend on the fund objectives and capabilities of the administrator. For many funds this requirement may be the final straw which prompts consolidation into an umbrella fund, Van Andel says.
He believes some employer-sponsored retirement funds will want to keep preservation in the fund to a minimum and will look to existing preservation fund providers for bespoke preservation funds for their members.
Van Andel says retirement fund providers should regard the default retirement fund regulations as an opportunity to pull the accumulation, preservation and annuitisation stages of retirement savings together into a seamless journey for you, the member.
Providers who can achieve this are likely to deliver a better income for you.
When you choose where to preserve your retirement savings, consider these:
Costs: Retirement funds for individuals like preservation and RA funds have higher costs than those catering for many members such as an employer-sponsored or umbrella fund.
However, Sanlam has aligned the investments and costs on its umbrella and preservation funds, says Kobus Hanekom, principal consultant at Simeka.
Alexander Forbes is also offering lower costs on its preservation fund to members who transfer their savings from employer-sponsored funds or umbrella funds administered by the company, says John Anderson, the head of group client services.
10X CEO Steven Nathan says it is vital to keep a lid on fees, as every 1% in fees you save over a 40-year period adds 30% to your retirement income.
Also look for a fund that does not have any early termination charges if you decide to move your savings to another provider, Nathan says.
Investment choice: Van Andel says the choice of underlying investments on your preservation fund and access to established top performers should inform your choice.
Nathan says if you have a preference for an investment style - either active management or indexing - then the availability of your preferred option would also be a consideration. However, any low-cost option will likely exclude most actively managed options.
Servicing: Van Andel says you should look for a provider that offers good service, with both digital access and the ability to talk to someone on the phone.