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Pension, Provident and Preservation Funds

Providing expert assistance for expats on how to access funds from South African pensions.

What is a pension fund?

A pension fund is a retirement fund offered by South African employers to their employees as part of their conditions of employment. It’s also governed by the South African Income Tax Act and the Pension Funds Act. Its purpose is to ensure you are provided for once you (the employee) reaches formal retirement.

As it’s part of an employment contract, it’s common for both the employer and the employee to contribute to the pension fund. Both will enjoy a tax deduction for contributions made, as prescribed by the South African Income Tax Act. (Note – the employee is also referred to as the member of the pension fund.)

If you reach your retirement age (generally determined in your contract), you’ll have limited access to your pension fund. A maximum of one third will be available as a lump sum, which will be subject to tax by applying the retirement lump sum tax table. The remaining funds in the pension will have to be applied to provide a monthly pension – also fully taxable. You can also choose to apply the full fund value to provide for the pension, so it’s not compulsory that a lump sum must be taken.

When you leave your job before reaching the retirement age, you generally have three choices. The first is to leave your funds in the pension fund. The second is to transfer the resignation benefit to a pension preservation fund, the new employer’s pension fund or a retirement annuity. The third is to withdraw the fund value as a lump sum, or a combination of the last two options. Any lump sum will be subject to income tax and the following withdrawal tax table.

Retirement annuity amount

Tax Rate

First R25 000

0%

R25 000 – R660 000

18% above R25 000

R660 001 – R990 000

R114 300 + 27% above R660 000

R990 001+

R203 400 + 36% above R990 000

 

Withdrawals from your pension fund will not be allowed due to emigration or the expiry of a visa. However, visa expiration or financial emigration both result in the employee resigning from employment, which makes full access possible through either of these routes.

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What is a provident fund?

A provident fund, like a pension, is a retirement fund offered by employers to their employees as part of their contract. It is also governed by the Income Tax Act and the Pension Funds Act. It is intended to provide for future retirement provisions once you reach formal retirement.

Both you, the employee, and the employer, your boss, will contribute to the provident fund. As a result, you’ll both enjoy a tax deduction for contributions made, as prescribed by the South African Income Tax Act. (Note -here, the employee is also referred to as the member of the provident fund.) If you, the member, reach your retirement age, which is generally determined by contract, the provident fund allows for your unlimited access to the fund value.

The member can then access the full fund value as a lump sum. However, you can elect to only take a portion as a lump sum and to apply the remaining funds to provide for the monthly pension or to apply the full fund value towards providing your retirement income. The lump sum will be subject to tax by applying the retirement lump sum tax table and the monthly pension option, if applicable, is also fully taxable.

When you switch jobs before retirement age, you have three choices. The first is to leave the funds in the provident fund. The second is to transfer the resignation benefit to a provident preservation fund or your new employer’s provident fund or a retirement annuity, and the third is to withdraw the fund value as a lump sum (or a combination of the last two options). Any lump sum will be subject to income tax and the withdrawal tax table will apply.

Access to your provident fund cannot be gained due to physical emigration from South Africa or the expiry of a visa, however, the cessation (expiry) of a visa or financial emigration will have the same result as if the employee resigned from employment, which will then give you full access to the funds.

What is a preservation fund?

A preservation fund serves as a savings vehicle into which proceeds from a pension or provident fund are paid. The only purpose of a preservation fund is to house and preserve proceeds from pension or provident funds. It’s a South African retirement fund and governed by the South African Income Tax Act and the Pension Funds Act. Preservation funds in South Africa are offered by insurance companies.

Only fund transfers are possible to a preservation fund – pension funds are transferred to pension preservation funds and provident funds are transferred into to provident preservation funds. You cannot make additional contributions to a preservation fund, but you can house proceeds from more than one source, only on condition that the nature of the fund source is the same. That means you can only make transfers from pension to pension preservation funds or provident to provident preservation funds.

Proceeds are transferred to a preservation fund when you leave your job because you’ve been dismissed, retrenched or you’ve resigned. There is no tax consequence on the actual transfer, this part of the transaction is tax-free.

Once the funds are transferred into the preservation fund, you, the member of the preservation fund will be entitled to make a single withdrawal from the fund before your retirement. That means it’s possible to access part of, or the full fund value in the preservation fund prior to retirement. Once you’ve used your power of withdrawal, you will not be able to make another until you reach retirement age. (It’s useful to note that a withdrawal is possible per fund source transferred into the preservation fund.)

If the member retires from the preservation fund, the rules applied to retirement in the event of a pension preservation fund will be the same for the pension fund. In the event of a provident preservation fund, it will be the same as a provident fund.

From 1 March 2019 a member will be able to gain access to the funds in a preservation fund due to emigration or the cessation of their visa. This will be possible even if the one withdrawal option has been used – if it is prior to retirement.

What is a deferred member of a pension/provident fund?

A deferred member is someone who was a member of the employer’s pension/provident fund and, upon leaving their employment, chose not to withdraw/transfer the proceeds from that fund.

Before reaching retirement age, this member can still access their funds by way of a lump sum or a transfer to another approved fund. However, if the retirement date is met, the normal retirement rules will apply, depending on whether it is a pension or provident fund.

What are the pension, provident and preservation fund withdrawal rules in South Africa?

To summarise, access to pension/provident and preservation funds, prior to retirement is as follows:

  • Upon resignation from employment, the member can access the full resignation benefit as a lump sum;
  • If the member transferred the resignation benefit to a preservation fund, one withdrawal will be possible from the preservation fund prior to retirement;
  • If the member emigrates or the visa expires prior to retirement, access to a pension or provident fund will be possible due to the resignation taking place (and not on account of the actual emigration);
  • If the member emigrates or their visa expires prior to retirement, access to a preservation fund is possible prior to 1 March 2019 if the one withdrawal option has not been used. After 1 March 2019 the member will be able to gain access to the funds even if the one withdrawal was used prior to emigration/visa expiry.
What are the tax rates on lump sums from any of these South African funds?

The Second Schedule to the South African Income Tax Act prescribes how retirement lump sums are taxed. There is one set of rules that apply to pre-retirement withdrawals and another set of rules for lump sums taken upon retirement, death or as a result of a member’s retrenchment.

To determine the taxable lump sum the following steps are taken:

  • Decide on the lump sum to be withdrawn from the retirement fund;
  • Deduct the following amounts:
  • Contributions made to retirement funds that did not qualify as a tax deduction;
  • Add the following amounts:
    • Any retirement lump sum received after 1 October 2007;
    • Any withdrawal lump sum received after 1 March 2009;
    • Any severance benefit received after 1 March 2011;
  • This will then be equal to the taxable lump sum;
  • The next step is to determine the tax payable on this total aggregated taxable lump sum by using the applicable table below;
  • In addition, the tax payable on all previous lump sums taken into account for aggregation purposes must be calculated using the tax table applicable to this instance (and not necessarily the tax table that was actually used when that lump sum was initially withdrawn).  This amount will then be deducted from the tax determined in the previous step.

Tax table applicable in the event of a withdrawal:

 

Amount

Tax Rate

First R25 000

0%

R25 000 – R660 000

18% above R25 000

R660 001 – R990 000

R114 300 + 27% above R660 000

R990 001+

R203 400 + 36% above R990 000

Tax table applicable in the event of retirement/death/retrenchment:

 

Amount

Tax Rate

First R500 000

0%

R500 001 – R700 000

18% above R500 000

R700 001 – R1 050 000

R36 000 + 27% above R700 000

R1 050 001+

R130 500 + 36% above R1 050 000

What’s the process to access South African pension/provident or preservation fund?

The fund value needs to be obtained from the specific fund administrator. Your eligibility to withdraw any lump sum from a fund will depend on:

  • Legislative limitations
  • The specified rules for the fund
  • What type of fund it is
  • Any previous withdrawals you’ve made
  • Your age
  • Your residency status while contributing to/withdrawing from the fund.

A withdrawal application must be submitted to the fund. After assessment of your eligibility to receive the cash in the fund, the fund administrator will pay the after tax amount intto a South African bank account.

This net amount can then be remitted offshore by any local bank using your foreign investment allowance.

What are the fees charged by FinGlobal to assist you with this process?

FinGlobal gives an initial consultation, which is cost and obligation free. A quote is given after we’ve conducted an assessment of your needs.

Our fees are fixed, transparent and always communicated upfront. We do not work on a commission-based system and you will only have to pay our fees upon successful completion of the service, and you can pay from your fund proceeds.

Contact us for a FREE consultation

We’ll answer all your questions. Your personal consultation is completely free and without obligation.






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We deal with all South African banks, insurance and investment companies, pension funds and other related financial institutions.

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