Transfers from preservation funds to retirement annuity funds

What was the problem? 

SARS published Retirement Fund Practice Note RF 1/2012 on 1 November 2012 and explained the problem. 

The IT Act provides for a tax neutral transfer from a preservation fund to a retirement annuity fund in terms of paragraph 6 of the Second Schedule. Although the definitions of "pension preservation fund" and "provident preservation fund" in the IT Act make no reference to transfers from preservation funds to retirement annuity funds, it did not have the effect of prohibiting such transfers, but such transfers were regarded as the member's once-off withdrawal. 

SARS explained that if an amount was transferred before the promulgation of the TLA Act 2012, the transfer would be tax neutral, but there was a risk that the benefit might be regarded as the member's once-off withdrawal if the legislation was not promulgated with retrospective effect. 

The effect of the change in the TLA Act 2012 to provide for transfers from preservation funds to retirement annuity funds is that members will be able to transfer from preservation funds to retirement annuity funds without such transfers being regarded as the member's once-off withdrawal. 

Because the change was made retrospective to 1 March 2012, any transfers that were done between 1 March 2012 and 1 February 2013 will not be regarded as the member's once-off withdrawal. 

 Why transfer to a preservation fund? 

• The preservation of retirement savings with the option to access the benefit via a once-off withdrawal before retirement (there is limited access to benefits in a RA before retirement: on emigration and where the value is less than R7000) 
• The once-off withdrawal option is allowed in respect of each benefit transferred to a preservation fund  
• Transfer from a preservation fund to an employer occupation fund is allowed (transfers are only allowed between RAs ie. there is lock-in) 
• Provident fund members retain their access to the full 3/3 of their benefit on retirement when transferring to a provident preservation fund (RAs provide for compulsory annuitisation of 2/3 of the retirement benefit) 
• RF 1/2012 provides that a member exiting their former occupational fund can access a portion of their benefit in cash before transferring to the preservation fund.

Why transfer from a preservation fund to a retirement annuity fund (RA)?

The definitions of pension and provident preservation funds in the IT Act do not provide for access to the benefit on emigration, whereas the definition of RA does. This means that a member of a preservation fund who has used his once-off withdrawal option before emigration will have no further access to the benefit on or after emigration and will have to wait until retirement to access the benefit. 

Transfers from preservation funds to retirement annuity funds allow a planning opportunity for members who plan to emigrate or who have emigrated and who may need access to their benefits before retirement. 

Planners who advise their clients to transfer from a preservation fund to a retirement annuity will have to consider a number of factors. These include: 

• The consolidation of a member's retirement savings from a number of funds to one RA may be attractive, but the consequence of such consolidation may remove the opportunity to "stagger" the member's retirement income by retiring from different funds at different times. Some RAs provide for "staggered retirement" in that a member may retire in respect of one or more investment accounts/policies while retaining other investment accounts/policies in the same funds, but others do not. 
  
  
• Some transfers to preservations funds are subject to conditions imposed by the transferring fund. These conditions may be such that a transfer to a RA may not be possible.

ReIevance to the Nedgroup Investments Retirement Funds[1]

The rules of the Nedgroup Investments Retirement Funds allow for all the tax neutral transfers in and out as provided for in the legislation, except for the Nedgroup Investments Provident Preservation Fund where the rules will have to be amended to provide for a transfer to a pension preservation fund.

The rules of the Nedgroup Investments Retirement Funds do not currently provide for "staggered retirement" which means that a member has to retire in respect of all investment accounts at the same time. This is being reviewed. 

Disclaimer: Please note that while care has been taken to ensure that the information provided in this communication is correct, it represents an overview of the topic under discussion and is offered for general informational and educational purposes. It is not offered as and does not constitute legal nor investment advice. 

[1] NGI Retirement Funds is a general reference to the: Nedgroup Investments Pension Preservation Fund; Nedgroup Investments  Provident Preservation Fund;  Nedgroup Investments Retirement Annuity Fund