Thank you for your question. We understand how rules around retirement or resigning may be puzzling sometimes and we find ourselves not knowing the options available to us. Therefore we will explain how preservation funds work.
Preservation funds were introduced in response to a need among members wanting to save their withdrawal benefits from an occupational fund in another kind of retirement vehicle until they reached retirement age, with the option of accessing those monies before retirement. This was done mainly to help workers who had been laid off, and who then faced financial hardship after failing to find a new job.
Members nevertheless chose to do this for several additional reasons, such as the clear advantages of tax deferral and preservation of retirement assets. Previously an employer-employee relationship was required for this type of fund. However they are now regarded as retirement funds, are approved funds, and therefore function similarly to pension, provident, and retirement annuity funds.
Certain rules apply to preservation funds:
- A member is allowed one full or partial withdrawal before retirement age, after which they can only access their funds at retirement according to the retirement rules.
- Withdrawals before retirement are taxed as per the withdrawal tax table.
- At retirement age (55) you can only access one-third of your investment and two-thirds must be transferred to an income-generating annuity.
- Withdrawals at retirement will be taxed as per retirement tax tables.
- At retirement, you may only take the full cash lump sum benefit if it is valued at R247 500 or less, or if you formally emigrate.
- The funds need to be Regulation 28 compliant. This is a limitation on how much exposure you are allowed in different asset class investments. For example, not more than 45% can be invested offshore.
No ongoing contributions can be made to a preservation fund; however tax-free transfers are permitted as follows:
- From a pension fund to a pension preservation fund;
- From a provident fund to a pension preservation or provident preservation fund;
- From a pension preservation fund to a pension fund, pension preservation fund or retirement annuity fund;
- From a provident preservation fund to a provident fund, provident preservation fund, pension fund, pension preservation fund or retirement annuity fund.
The limitations on transfers from pension preservation funds were put in place to prevent benefits from being split into amounts less than R247 500, which may allow for access to the entire capital after retirement as opposed to the restricted one-third.
The sums receivable by a pension preservation fund from another fund may not be paid or transferred in a way that divides the funds among multiple pension preservation funds.
To answer your question – yes, you can transfer your preservation fund to your current employer’s retirement fund at no cost.
However, although legislation permits the transfer of preservation funds to other retirement funds, fund rules differ, and some funds do not accept certain transfers from certain retirement funds.
Therefore, depending on the receiving fund rules, your transfer may be accepted or rejected.
The best way to know if your transfer may be accepted or not is to request a ‘transfer out’ form from Old Mutual and specify the fund you would like to transfer to, and they will let you know if you can proceed or not.
Please note that once you do transfer the funds, you will have to adhere to the new fund rules. Municipal and government pension funds usually have a designated asset manager that determines the investment strategy, meaning that you will not have a choice regarding the underlying funds you would like to invest in and the investment strategy you would like to use.
The Government Employees Pension Fund publishes a valuation report every three years which reports on whether the fund is invested in assets that still serve the purpose of the fund. It also publishes annual reports that look into fund performance and factors that affected the performance. Furthermore, details on any changes to be made to the fund benefits are made available in newsletters that are usually published in four editions throughout the year.
The Municipal Employees Pension Fund does not publish these reports online; they are only available upon request, depending on whether you are authorised to receive such information. Clients receive statements annually and upon request.