Can you combine your retirement annuities, preservation funds and pension or provident funds into the same pension?

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31 December 2021
The short answer is yes! However, there is more to this than meets the eye. Over the course of a lifetime, people can collect many bits and pieces of retirement funds that are lodged in various places.

Preservation funds came into being in South Africa in May 1989. They were intended as a safe haven for the money that became available from pension and/or provident funds when someone resigned from their job. 

Up until then, people who had resigned or who were dismissed or retrenched, could only transfer their pension or provident fund to a retirement annuity – providing a safe place for their money, with tax advantages.  In some cases, they could transfer it to the retirement fund of their new employer instead. 

To many people, retirement annuities were disadvantageous because once you had invested your money, you were unable to withdraw any of it before the age of 55. And even then, you could only withdraw a maximum of one-third, with the rest having to be used to invest in a pension.

This caused people to withdraw their pension and provident fund money, pay any tax necessary, and have it available for a rainy day rather than locked away.  This was unsatisfactory as it meant that few people preserved the money that they had intended to save for retirement. 

In May 1989, preservation funds became available.  These were pension and provident funds that had special rules. If you resigned or were retrenched, you could transfer the money from your pension or provident fund to a preservation fund without paying any tax on that transfer. You couldn’t continue to contribute to these funds, but your money was not reduced by tax. Plus, if you left it there until retirement, it would grow.

Most importantly for individuals, you could withdraw all or a part of the preservation fund in cash at a later date. Sure, you had to pay tax on whatever you withdrew at that time, but at least you had access to your money if you needed it. 

On reaching retirement, your preservation pension fund or preservation provident fund retained their character.  This means that if you had a preservation provident fund, you could still withdraw the entire amount in cash, if you wanted to.  Preservation pension funds were subject to pension fund rules at retirement in that you could withdraw up to one-third in cash, but whatever you didn’t take in cash you had to invest in a pension fund.

I was retrenched in April 1989 and just missed the chance to invest in a pension preservation fund.  So, I invested my little bit in a retirement annuity.  In retrospect, I am very glad because I was unable to give in to temptation before I reached fifty-five, which kept the capital intact.  By the time I was able to cash in the one-third, I no longer needed it.

A lot of people have a collection of retirement annuities, preservation funds and the proceeds of their current retirement fund when they retire. And many wonder whether they can combine them into just one or two investments in pensions. They also wonder if they should do that.

 

THE ANSWER TO THE FIRST QUESTION IS: YES, YOU CAN COMBINE ALL YOUR SEPARATE RETIREMENT ANNUITIES, PRESERVATION, PENSION AND PROVIDENT FUNDS!

 

The answer to the second question is a little different should you combine these different elements.

From a cost point of view, combining the money from several preservation funds, retirement annuities and provident or pension funds offers a chance to negotiate lower fees.  Lower costs mean better net returns for investors.  Active fund managers and many advisors maintain that high costs are not a problem which is not entirely true.  Most of the public believe that there is no price on these investment products because no one presents an invoice. However, the costs continue for the life of the contract, which is often the same as the life of the pensioner, and they add up to very big amounts of money.

Consolidating these amounts also simplifies tax matters. If you have, say, four or five pension streams from different institutions, you will find that each institution deducts PAYE tax from their pension payments to you. The problem is that they each tax you as though the pension that they pay you is your only income. This means that unless you arrange with SARS for a directive to tax all the income streams at the correct tax rate, you will be undertaxed. This results in demands for more tax when you assumed that you had paid your tax in full.

Retirement annuities have maturity dates that were set when such a policy was taken out. Many people believe that such contracts can only be turned into pensions at the predetermined maturity date. This is not true, although there are some strong feelings about an early maturity value being a little less than the figure illustrated for the original maturity date.

One must bear in mind that if you move to a pension earlier, for instance for consolidation purposes, the amount may be less, but that will be because you will have stopped paying premiums earlier.  The argument that this is bad does not take the present value of money into account nor does it appreciate that if the pension is paid earlier the pensioner does not have to find the money to pay those premiums.

 

Splitting your pension money

It is becoming popular to split your retirement capital into two annuities - some into a life annuity to provide a minimum guaranteed income and the rest into a living annuity to take advantage of making your own investment choices. 

The argument about consolidating your funds still holds if you are going to take a number of retirement funds and reduce them to, say, two pensions. Larger amounts will be easier to negotiate lower fees for, and that is an important consideration. If anyone tells you that they cannot reduce their fees due to regulations or laws, they might be misleading you.

 

 

 

D.L. Crawford CFP ®

OUTvest is an authorised FSP. All investments are exposed to risk, not guaranteed and dependent on the performance of the underlying assets. Ts and Cs apply.

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