Am I legally required to draw my pension, or can I rely on other income?

It depends on the fund rules, but moving the funds to a preservation fund is also an option.

I am a 56-year-old male with a contract pensionable age of 60, but will likely continue working on a contract basis until the age of 63 due to a skills shortage in the engineering sector. I estimate R5.5 million in pension/provident savings with Allan Gray and contribute to my current employer’s provident fund, valued at R1.2 million, earning R110 000 gross.

I own several paid properties in the Western Cape, yielding rental income comparable to my salary, along with profitable hobbies that generate additional income. I aim to rely on these income sources without tapping into formal savings for as long as possible.

Upon termination of my contract, am I legally required to draw from my pension funds, or can I rely on my other income sources and let my pension continue to grow?

Since pension funds are excluded from estate taxes, I prefer to use them as late as possible, if necessary. If required to draw from my pension, how can I minimise tax on the 2.5% minimum withdrawal, given my limited need for these funds?

In terms of your employment contract, the contractual age of retirement relates to your retirement from employment, not necessarily your retirement from the employer provident fund.

If the rules of your provident fund allow for the retirement of the fund to happen later than age 60, you will be allowed to remain a member of the fund after you have retired from employment. You then become a deferred pensioner in the fund.

Read:Retiring from your fund: The sequence of events to follow

If the rules of your provident fund currently do not allow for this option, it may be worthwhile to petition the fund’s trustees to consider such a rule amendment.

This option presents a cost-effective way of preserving fund benefits for members who can defer their actual retirement from the employer-sponsored fund.

If the rules of your provident fund still do not allow this option when you reach retirement age at 60, you can transfer your money to a provident preservation fund.

In the provident preservation fund, all your retirement benefits will remain intact, and the funds will continue to grow if you don’t want the income.


Preservation funds: Your questions answered

The advantages and disadvantages of a preservation fund

Should I move my provident fund to the GEPF, an RA or preservation fund?

As mentioned in your question, when you retire from the fund, should you elect to purchase a living annuity, the minimum income level from such an annuity is 2.5% per year. This income taken will form part of your taxable income.

Options to limit the income tax payable include the following:

  • You can retire from the funds once you reach 65 and 75, as additional rebates would apply.
  • Your marital relationship also plays a role, as any passive income, such as rental income and interest, is automatically split 50/50 between spouses when married in community of property. If you are married in community of property, you can take advantage of these tax implications.
  • If you have a life partner or spouse, and you aren’t married in community of property, you could also consider transferring some discretionary investments (i.e. investments other than retirement funds) to your life partner or spouse, as the Income Tax Act considers a permanent relationship partner as a spouse. There also isn’t any donations tax between spouses. Bear in mind that asset transfer costs of some assets (such as fixed property) may be too expensive to warrant such a step.
  • Contributions to a retirement annuity can be used to create a further deduction for future taxable income.

Read/listen: Should minimising income tax during retirement be the top priority?

An important consideration to also bear in mind when deciding on the appropriate time to retire from your retirement funds is that you no longer need to comply with Regulation 28 after retirement. Regulation 28 only applies to pre-retirement savings and limits how much you can invest offshore, for example.

Another consideration is that a living annuity allows funds to be transferred to specified beneficiaries more easily and quickly in the event of death. This is because Regulation 37C does not apply to living annuities, and your beneficiaries will not be subject to delays and payment decisions from the trustees of the retirement fund.


Estate planning: Death and your retirement investments

Life and living annuities in the context of your estate plan

What happens to a living annuity if there is no will?

Lastly, it’s also relevant to remember that living annuities, like pre-retirement funds, are excluded from your estate for estate duty purposes.

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Harry Byrne

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