YOUR MONEY: Retirement annuity or preservation fund?

Question:

I am leaving my job and have the option of transferring my provident fund to a retirement annuity, or a preservation fund. What is the difference between them, and which is the better option?

— Sean H

Answer:

When leaving an employer, one of the greatest gifts you can provide your future self is the principle of reinvesting these funds. So many South Africans are tempted to withdraw their retirement savings from work when changing employment, and essentially start over every time. Without the benefits of time and compound interest, the time lost with these withdrawals can have a detrimental effect on your retirement one day.

Before we discuss the product options, here’s an indication of the power of preservation and remaining invested:

INSERT GRAPHIC HERE

The main differences between the two products at present are as follows:

With a preservation fund, you will have slightly more accessibility before the age of 55. You are allowed one withdrawal (either in full or partial) from the preservation fund. Should you opt for a partial withdrawal, the remainder of the funds need to remain in place until you are 55. After the age of 55 you can retire, and new options become available.

You are not allowed to add monthly contributions to a preservation fund. Essentially, this option would be reinvesting a lump sum and ideally only touching it again at retirement.

The rules on provident and pension funds have changed, which has an implication on the preservation fund as well — whether it is a pension or provident preservation. For a pension preservation, you will only be allowed a maximum one-third withdrawal. All withdrawals are taxable on the withdrawal sliding scale before the age of 55.

A retirement annuity is a more restrictive product in the sense that you may access this product only after the age of 55 when you can retire. You may, however, add monthly contributions to this product, which will be tax deductible. You can deduct 27.5% of your annual taxable savings income, up to a maximum of R350,000 a year.

Both products are bound by regulation 28, which governs the investment strategy and asset allocation allowed. They are also both excellent products for estate planning, as they are not included in your estate.

On September 1 the two-pot system will be put in place. This will change all future rules on retirement products. Existing products will “vest” and the rules will remain the same. Future investments will, however, have a new set of rules.

I recommend navigating these decisions carefully with your wealth adviser.

— Elke Brink is a wealth adviser at R21 Wealth Management, Stellenbosch

We’d like to hear from you. E-mail us on yourmoney@fm.co.za