In line with Section 37 of the Pension Funds Act, the trustees of the retirement fund will distribute the proceeds, considering first the needs of your dependents and then the beneficiaries listed in your nomination form. It is thus important to fill in and update your nomination form annually. Your investment will be taxed on the same basis as on retirement.
WHO SHOULD CONSIDER USING A PRESERVATION FUND?
You should consider a preservation fund when withdrawing from a pension or provident fund (due to resignation or retrenchment).
WHAT ARE THE TAX BENEFITS OF A PRESERVATION FUND?
A preservation fund preserves your investment and the tax benefits of a pension or provident fund.
- Investment returns are tax free – there is no income tax or capital gains tax.
- Benefits are taxed on a favorable basis – lump sum benefits are taxed on a sliding scale with a portion of the benefit tax free (see details under “What is the tax on your preservation fund benefits?”).
You do not pay tax when you transfer to a preservation fund, provided you transfer from a provident fund to a provident preservation fund, or from a pension fund to a pension preservation fund. From 1 March 2016 (or possibly 1 March 2017) all retirement fund transfers will be tax-free.
HOW MANY PRESERVATION FUNDS CAN YOU JOIN?
You can join multiple preservation funds (you may join a new fund every time you exit a pension or provident fund), but the tax benefit is determined in aggregate, not in respect of each individual fund, therefore the tax free lump sum portion may be claimed only once.
WHEN CAN YOU ACCESS YOUR PRESERVATION FUND?
You can make one partial (or full) cash withdrawal at any time before you retire. On retirement from a pension or provident preservation fund, you may take a maximum of one third of your lump sum as cash; with the balance you must purchase either a living or a conventional annuity, which will pay you a regular income. This general rule is subject to the vested right on your provident or provident preservation fund.
On retirement from a provident preservation fund you may take your “vested right” as a cash lump sum. The vested right is the balance on your provident or provident preservation fund at 1 March 2017, and the subsequent return thereon. If you retire from the provident preservation fund before this “vesting date”, you may claim the full amount as a cash lump sum.
CAN YOU CONTRIBUTE TO A PRESERVATION FUND?
No. You can only transfer your proceeds from a pension, provident or preservation fund to a preservation fund.
WHAT HAPPENS IN THE EVENT OF A MEMBER’S DEATH?
In line with Section 37 of the Pension Funds Act, the trustees of the fund will distribute the proceeds, considering first the needs of your dependents and then the beneficiaries listed in your nomination form. It is thus important to fill in and update your nomination form annually. Your investment will be taxed on the same basis as on retirement.