Dear reader,
This is a question that perhaps needs to be viewed from the perspective of your future self, looking back. I believe the most ideal place to be in any investment portfolio is to keep your options open for the future, ensuring you have room to change strategy if needed. There are many uncertainties in the investment space – especially in the local arena – and political and economic uncertainty that can have an impact on your investment. Planning accordingly is definitely recommended.
If we fast forward to your retirement date, if all your funds would be in the GEPF, your options will be quite limited in structuring a retirement. Depending on your timeframe with the employer the benefits will differ.
At retirement, in terms of the GEP Law, if a member has less than 10 years of service they will get their actuarial value paid to them as a gratuity (lump sum). If a member has more than 10 years of service, they will receive a gratuity as well as a monthly pension.
Especially if less than 10 years, I would however consider keeping your options more open.
My recommendation would definitely be to rather reinvest the funds in your personal capacity, as you will have more flexibility in making changes to these portfolios going forward.
There are two main differences when considering a preservation fund versus a retirement annuity.
A preservation fund allows more accessibility as you are allowed to make one partial/one full withdrawal before retirement (this will be taxable at the withdrawal tax table – revised after the last budget speech). Should you opt to take a partial withdrawal before retirement, the remainder of the funds will need to remain invested until you retire.
From the age of 55, you are allowed to retire – which provides you with a range of new options.
- You are allowed to nominate a beneficiary on this investment – great for estate planning.
- In terms of the Pension Funds Act, the death benefit does not form part of a deceased estate and therefore it will not be subject to executor’s fees or estate duties. More importantly, it will pay directly to the beneficiaries and not be tied up in the lengthy winding up of the estate.
- You are not allowed to make additional monthly contributions to this investment – so to answer your compound interest question, this scenario won’t be ideal for that.
A retirement annuity provides less liquidity, but with the added benefit that you are allowed to make monthly contributions to this investment which can be claimed back annually from Sars. You can deduct up to 27.5% of your remuneration or taxable income on an annual basis, up to a maximum of R350 000 p.a. Anything over and above these contributions will form part of a “disallowed contribution” pool, which you can access at retirement tax-free.
You are allowed to withdraw R550 000 tax-free at retirement from your retirement portfolio, provided you have made no previous withdrawals from a retirement fund, which you can increase with your “disallowed contribution” pool.
This concept is underutilised in the investment space (refer to my article Creating a tax-friendly retirement for more information).
You are allowed to nominate beneficiaries on this investment vehicle as well, which makes for an excellent estate planning tool.
Both investment vehicles are governed by Regulation 28, which determines the investment mandate that needs to be followed. Regulation 28 was amended in 2022 – providing more scope for offshore diversification. Previously capped at 30% for all South Africans, it is now possible to increase this to 45%.
I think this provides a ‘best of both worlds’ scenario for South Africans, as you have the opportunity to diversify significantly in the asset allocation space, while optimising your annual tax benefits as well.
From an annual tax benefit and compound interest perspective, I would recommend opting for the RA. If you want to keep accessibility as an option, then the preservation fund would be a more suitable route to follow.
With any resilient investment portfolio over time, you would ultimately have a few different investment vehicles. This assists in diversifying vehicles as well as the investment strategy.
The recommended portfolio will consist of your retirement fund at work, a personal RA/preservation fund, a tax-free investment, and a voluntary investment (mostly used for an emergency fund/shorter-term goals). This can be further enhanced with property and share portfolios and other alternative assets.
The more flexibility you have with the investment strategy followed, the fee structure, and the conversion into other products, the better.
