Deciding what to do with your retirement savings with your current employer is one of the most important financial decisions you need to make. Instead of encashing your commutable portions when leaving your employer, you should keep them invested – or preserved – for retirement. You can either preserve the retirement savings in your current fund or transfer them to a new fund.
What is it?
A preservation fund is a retirement fund set up in terms of the Retirement Funds Act. It’s a secure, tax-efficient investment product. Members who wish to transfer their accumulated retirement savings from their current retirement fund to the preservation fund are able to do so – tax free.
What are the tax benefits?
You do not pay tax when you transfer to a preservation fund from another retirement fund – no income tax, no capital gains tax. Normal retirement age for the fund is from age 55, unless if you are retired on ill-health, where the claim will be treated as a normal retirement. If you retire from the Fund you must, by law, use at least two-thirds of your retirement savings in the fund to buy a pension (annuity) from a registered insurer. You can structure this pension to meet your personal needs. Regular payments from the annuity will be subject to tax. You can also take up to one-third of your retirement savings as a cash lump sum, which is also tax free.
When may you withdraw, and how much?
You are allowed one partial withdrawal of up to 25 percent from your retirement savings, before age 55 provided you are unemployed. However, there is a waiting period of 12 months after your transfer in to the preservation fund. After that, you can access the balance at retirement, from age 55 onward. If you pass away, the benefit will be paid to your beneficiaries. You are therefore required to nominate beneficiaries who will receive your benefit in the event of your death. This will assist trustees to allocate your death benefit after they have investigated your financial dependants in terms of Section 39 of the Retirement Funds Act.
How your retirement savings grow
Once your savings have been transferred and received into the Preservation Fund, your benefits will be invested in line with the investment strategy of the Fund which determines how much you receive when you leave the fund. It’s important that a well-thought-out investment strategy is put in place so that your retirement savings in the fund grow in the long term. The trustees set the fund’s investment strategy and continuously monitor the returns against the agreed benchmarks. You are not allowed to make contributions into the preservation fund, however, your investment will grow in line with its investment return.
By Poloko Masitara – Chief Executive Officer, Alexander Forbes Botswana