Question:
My sister's husband retired from his employer's provident fund about six years ago. He invested his retirement money in a compulsory guaranteed annuity for 10 years. This annuity expires in 2014.

What are her rights with regard to this money? Can she move these funds to another financial services company?

Answer:
There are a number of ways in which a provident fund can be treated at the retirement date. The first option is to take it all out as cash and then invest it yourself, after paying the tax due on it. Any pension amount over R300 000 will be taxable, so if the fund (remember to add the value of any other fund that you may be cashing out at retirement too) is more than this other options are worth looking at.

Any portion paid into a compulsory annuity is tax free going into the annuity. This is why many people take the tax free benefit of R300 000 and put the remainder into a compulsory annuity.

If you apply the sliding scale tax benefit, a few clever manoeuvres could mean that you take out more at a reduced rate of tax ? perhaps up to R600 000 ? because the monthly annuity payments will be taxable at marginal rates. If your marginal rate of tax is higher than 18 percent (or 27 percent, or 36 percent) you could opt to rather pay the lower tax now.

Traditionally, the products available to transfer the taxable portion into were rather limited. They were:

  • a guaranteed amount paid for a fixed term; all payments ceasing after the term is completed (the danger being you could outlive your income);

  • a single life annuity where when the owner died no more payments were payable to a spouse. Such an annuity is guaranteed only until the death of the owner at a level rate or escalating marginally each year to compensate for inflation;

  • a joint life annuity where the spouse (usually) received a smaller guaranteed annuity after the passing of the first spouse and it ceased on the death of the second spouse;

  • a living annuity where no annuity was guaranteed and all annuities were a percentage of the amount held in the fund. If the fund performed well, the annuity went up and if it performed badly the annuity went down. This is quite a scary concept if a pensioner has to count their pennies! The up side being that the spouse received the same annuity and when she/he died the children could inherit whatever was left.

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