Dear reader,
Thank you very much for your question as it is important to understand when you can retire and what the tax implications are, if any, on taking a portion in cash.
Firstly, what is an RA? An RA is a specialised investment vehicle designed for individual investors who want to save for retirement in a tax-efficient manner. RAs are governed by the Pension Funds Act of 1956 and are available as investment vehicles for any taxpayer wishing to fund their retirement.
There are essentially two types of RAs – insurance-based RAs and unit trust or collective investment scheme (CIS) RAs.
In answering your question, it is important to understand the difference between the two.
(a) Insurance-based RA: These traditional RAs are essentially insurance contracts held in the name of an individual and are underwritten by the insurer. The RA contract sets out the terms and rules of the policy in respect of contributions levels, frequency and investment horizon.
If the policyholder breaks the terms of the contract, the insurer may charge penalties. These penalties are governed by the Long-Term Insurance Act 52 of 1998 (Section 54, Part 5) and the act provides parameters to insurance companies as to how much they may charge.
In determining the penalty, the insurer’s actuaries will calculate the penalty payable due to the breach of contract while adhering to the parameters set out in the act. This is why, when you request a change or cancellation of your policy, the insurance companies will provide a cancellation/alteration quote so as to illustrate the possible penalty charge.
(b) Unit trust RAs: New-generation RAs are housed on linked investment service provider (Lisp) platforms and are unit trust-based investments held in the name of the individual investor. A Lisp platform provides individuals with various unit trust and hedge fund portfolios, including the ability to diversify into various funds within your RA, although it is important to note that the investment is subject to the limitations set out by Regulation 28 of the Pension Funds Act.
The penalty percentage charged on an insurance-based RA is affected mainly by (i) cancellation of the premium (making the policy paid up) or (ii) retiring from the annuity before the pre-determined retirement age that was set when you took out the policy.
This is due to the upfront commissions that were paid to the broker who sold you the policy and the fees being recouped over the forecasted duration of the policy (which was calculated on the contractual term of the policy). One should therefore expect that the closer the policyholder gets to retirement age, the smaller the penalty will be percentage-wise.
Based on your information, you would have already paid a penalty when making the RA paid up and, being age 55, you should expect the percentage to be relatively lower than the maximum set out in the Long-Term Insurance Act.
A member of an RA may only retire from it before age 55 in the event that they become permanently incapable of carrying on their occupation due to severe illness, or physical or mental disablement.
From the facts provided, you have reached normal retirement age which means you are able to retire from your RA.
Normally, a member may only take one-third of their retirement benefit as a cash lump sum, while the balance of the fund must be used to purchase either a life or living annuity. An exception to this rule is if the total benefit is R247 500 or below, in which case the investor can withdraw the full amount.
In your particular case, you will be permitted to take the full R27 987 in cash and, if you haven’t retired or withdrawn from any other retirement funds, this benefit will be free from tax. This is because your benefit will be taxed on the more favourable retirement tax tables where the first R550 000 withdrawn is tax-free.
