Many investors who believed they should be able to withdraw their full retirement funds, given the individual fund totals being below the R247 500 threshold, have met with frustrations that due to certain regulations, this isn’t possible.
Legislation currently states that when a retirement fund is below the threshold of R247 500, the investor, provided they are older than 55, can retire from the funds and withdraw the full amount, subject to the retirement lump sum tax tables. What isn’t made clear though, is that this threshold applies to an investor’s combined retirement values at each service provider, and not just at an individual contract level.
For example, if you had three retirement annuities at three different service providers of R100 000 each, you would be able to commute all three into cash.
However, if you had three retirement annuities of R100 000 at one service provider, this total amount would be over the threshold and prevent you from commuting all the funds.
With that in mind, it is important to remember that you do have options to access a part of your funds and provide yourself with an income. If your value is above R247 500, compulsory annuitisation applies and two-thirds is required to purchase an annuity, either a life annuity, living annuity or a combination of the two.
A life annuity is a guaranteed income for the remainder of your life. When purchasing a life annuity, it is important to consider ensuring that the income increases in line with inflation so that you do not lose purchasing power. A life annuity is only paid to you while you are alive and all investment risk is transferred to the life annuity provider. There is also no capital preservation, as once you pass away your income ceases. The starting income that service providers will quote you will depend on a few factors, but the main considerations will be your age and the total value of funds you would be willing to use for your life annuity.
A living annuity is an investment in your name, where you have freedom in terms of fund selection, portfolio structure for the investment and certain flexibilities in your drawdown strategy. You may draw between 2.5% and 17.5% per annum of the fund value as an income, where this income may be paid to you monthly, annually, quarterly or bi-annually. A living annuity does not form part of your estate in the event of your death and therefore has advantages when it comes to estate planning.
Assuming that you need as much access to liquid funds as possible, given the above options, retiring from your funds and choosing a living annuity would be the most viable option.
In this scenario, you would be able to take a maximum cash commutation of one-third of your funds. This commutation would be subject to your retirement lump sum tax tables, where your first R550 000 is tax-free. It is important to note that previous withdrawals will affect the tax-free portion, so it is always important to request a tax directive before assuming the full amount will be free of tax.
The remaining two-thirds, would be used to invest in a living annuity, where you would have the option of withdrawing up to 17.5% upfront as an annual amount and would be subject to income tax. Even when this is below the income tax threshold, you would need to take into consideration any other taxable income you would be earning before assuming you won’t be liable for any tax.
The remaining funds in the living annuity would have to remain untouched until your next anniversary in 12 months’ time, at which point you would be able to withdraw another 17.5% of the fund value. Once the living annuity funds drop below the threshold of R125 000, you would be able to commute the full fund value, subject to retirement lump sum tax tables.
As you can see from the above, there are a lot of options to consider and different decisions to navigate. We always recommend that you engage with a certified financial planner to help you navigate this.
Article credit: https://www.moneyweb.co.za/qa/advisor-questions/why-cant-i-access-the-full-r350k-in-my-ras/
