STELLENBSOCH UNIVERSITY RETIREMENT FUND GUIDE TO THE WITHDRAWAL PROCESS (excludig retirement on pension)

Transcription

1 1 of 10 STELLENBSOCH UNIVERSITY RETIREMENT FUND GUIDE TO THE WITHDRAWAL PROCESS (excludig retirement on pension) 1. INTRODUCTION This guide has been compiled to assist you as a member of the University of Stellenbosch Retirement Fund now that you have decided to leave the Fund before your retirement. If you are planning for your retirement, please read the Guide to the Retirement Process put out by the University of Stellenbosch Retirement Fund. You will have important decisions to make when you leave the Fund which can influence your long-term financial security. You are thus advised to approach a financial adviser to assist you, should you think it necessary. 2. BACKGROUND: HOW DOES THE FUND WORK? The Fund is a fixed contribution fund. This means that contributions are paid monthly into the Fund at a fixed percentage of your pensionable income. These funds are invested in order to earn investment income. All investment income, including interest and capital growth, is allocated to you in the form of monthly interest. Please note that the Fund s assets are invested in balanced investment portfolios, which include substantial investment in shares. This kind of asset has volatile market values and it is possible that the growth of the investment can be negative during some periods. The University makes additional monthly contributions to cover the insurance premiums for death cover and disability income benefits. The administrative costs of the Fund are paid from the Fund assets.

2 2 of 10 The accumulated contributions and the investment growth on them represent your Fund Credit. Additional to the Fund Credit, an additional amount for the Retirement Reserve Fund (RRF) is kept in the Fund, which was transferred to the Fund for some members on 1 November 1994 from the Pension Fund for Associated Institutions (PFAI) or the Pension Fund for Temporary Employees (PFTE). This RRF amount was calculated at the time in an attempt to make up for the under funding of the PFAI and PFTE on retirement, based on certain actuarial assumptions. The RRF is accumulated at the same investment growth as that allocated for normal contributions. In terms of the agreement concluded with members when the Fund was established, the RRF amount is not paid out on resignation or dismissal. A portion of the accumulated RRF is indeed paid out in cases of retrenchment or early retirement. The latter is discussed in the next section. 3. BENEFIT ON ENDING MEMBERSHIP OF THE FUND If you leave the Fund before your retirement, you will be entitled to a withdrawal benefit equal to your Fund Credit. If you leave the Fund as a result of staff reduction, you are also entitled to a portion of your accumulated RRF amount. This portion will be calculated as the ratio between your completed years of service at the University and your potential service up to and including the Fund s normal retirement age (60 years) or such later age (not later than 65) as specified in the member s service contract with the Employer and communicated in writing by the Employer to the Trustees. The following example demonstrates how this calculation is made: Assume a member with 7 years of completed service, at the age of 51 years. The member has thus 9 years of potential service before normal retirement age, which is 60 minus 51 years. The member s total years of potential service are thus 16 years (7 years completed service plus 9 year s future service). As a result of staff reduction the member will thus receive 7 /16 ths (that is 43.6%) of his/her accumulated RRF amount.

3 3 of 10 The most important decision that you must make when you leave the Fund is whether you wish to receive your withdrawal benefit as a single cash amount or if you prefer to keep it for your retirement by transferring it to another retirement product. If you take your benefit in cash, it will be taxed. If you keep it by transferring it to another approved fund (including a trust fund) or a retirement annuity fund, it will not be taxed on the date of withdrawal from the Fund. The Administrators of the Fund, Alexander Forbes Financial Services, will calculate the value of your withdrawal benefit on the date you leave the Fund. The administrators will also apply to the Receiver of Revenue for a tax directive and will pay the net benefit. Your various options with regard to the payment of your benefits are discussed below. 4. CASH BENEFIT If you decide to receive your full withdrawal benefit as single cash amount, the benefit will be taxed at the highest of your average tax rate in the present or previous tax year. The first R1 800 of the benefit is, however, tax-free. If you transferred money from the PFAI or PFTE that transfer value will also be tax-free. (Please note that a transfer from a pension fund to a provident fund is subject to income tax.) The Fund s administrators are obliged to deduct this tax from your benefit before the net benefit is paid to you. If your salary is greater than R (or whatever the limit might be from time to time set by Receiver of Revenue) the amount of tax payable will be determined by your local tax office. Once the administrators have calculated your benefit, they will apply for this tax directive. The administrators will pay the balance of your benefit only once this tax directive has been received. If your tax matters are not in order or up to date the payment of your benefit to you will be delayed. If tax is deducted from your benefit, it will automatically be paid to the Receiver of Revenue, and you will receive an IRP5 form from the administrators providing proof that the tax has been paid.

4 4 of 10 The withdrawal claim form makes provision for you to fill in your bank account details, in which case the funds can be paid directly into your account. 5. PRESERVATION OF BENEFIT You may request that your withdrawal benefit be preserved for your later retirement. In this case, your benefit must be transferred to another approved fund. The new fund must acknowledge receipt of the transfer value by signing an Acknowledgement of Receipt (AOR). Once the administrators of the Fund receive this form, your local tax office will be requested to issue a nil tax directive, which means that no tax is payable on this transfer. The fund to which you transfer your benefit will fall into one of the following categories. 5.1 Your new employer s fund If you are leaving the University to join a new employer who offers a retirement fund to employees you may be entitled to transfer your withdrawal benefit to that fund. This is, however, dependent on the rules of the new fund allowing such transfers. The benefits that you will eventually enjoy under the new fund, and the options offered to you, will depend on the new fund s rules and benefit structure. Normally, there are no costs involved in such transfers. 5.2 Retirement annuity funds A retirement annuity fund is an individual policy which is drawn up by an insurance company. Money is invested in the policy until you decide to retire. When you retire you may take up to a third of the value of the policy as a single cash amount. The balance must then be used to purchase a pension. This pension can normally be bought from any insurance company. You may not remove your funds from the policy before you retire under the policy. If you already have a retirement annuity policy, you can request that your money be transferred to your existing policy. Please indicate the name of your retirement annuity policy and the policy number very clearly on your withdrawal form.

5 5 of 10 Your financial adviser will be able to provide you with further information on the various retirement annuity funds that are available, and the various investment options offered by the policies. 5.3 Preservation funds Preservation funds are set up specifically to receive withdrawal benefits from retirement funds. Money transferred to a preservation fund is invested until you decide to retire. There are preservation pension and preservation provident funds. Because the USRF is a provident fund, you may use only preservation provident funds. When you retire under a preservation provident fund, you may choose to receive you full retirement benefit in cash or to use a portion of it to purchase an external pension. A unique characteristic of a preservation fund is that it allows you to make one single withdrawal from the fund before your actual retirement. Such withdrawals are taxable. In terms of the current legislation the University of Stellenbosch must register as a participating member of any preservation fund to which you wish to belong before you leave the employment of the University. You and your financial adviser must thus provide the required documentation timorously if the University is not already a participating employer of the preservation fund of your choice. Please note the following important conditions concerning the use of preservation funds: i) you must apply six months before your retirement date for the transfer and that your employer also must have registered before your retirement date as a participating employer in the trust fund of your choice. Otherwise you will not be allowed to transfer your withdrawal benefit to the trust fund; ii) If you use any portion of your withdrawal benefit for settling a housing loan, it will be regarded as the single permitted withdrawal under the preservation fund. No further withdrawals will be allowed. The amount used to settle the housing loan will be taxable; iii) You may not transfer your withdrawal benefit to more than one preservation fund.

6 6 of THIRD DIMENSION ENDOWMENT POLICIES If you earlier had the option to invest a portion of your Fund Value in a Third Dimension Endowment Policy, and decided to do so, you need to take further decisions in this regard. If you have not invested in 3D policies, you can ignore Section 6. When you resign you have the following choices with regard to your 3D policy: i) You can request to cash the 3D policy under the Fund, and to add these proceeds to your Fund Credit. Thereafter you can choose to receive your Fund Credit (which now includes the proceeds of your 3D policy) in cash or to retain it for retirement. ii) Alternatively, you can request to take cession of your endowment policy, in which case the Fund will arrange that the ownership of the policy be transferred to you. You thus take ownership of the policy. In such a case, however, the Receiver of Revenue will consider that you received this portion of your benefit as a cash amount, and consequently you will not be able to transfer the balance of your Fund Benefit to a preservation fund (see also 9.3). You may transfer the balance to a retirement annuity fund. The workings and applications of 3D policies are fairly complicated and you are strongly advised to contact a knowledgeable financial adviser if you have invested in a policy of this kind. 7. WHICH FUND? Before you decide which fund you wish to transfer your withdrawal benefit to, you should take the following into account: i) What long-term risks are you willing to accept in your retirement planning? ii) Will you have access to your funds before you retire, in cases of genuine need? iii) How much adaptability and choice do you want? iv) What are the costs involved? v) Will you take cession of your 3D policies? 8. YOUR FINANCIAL ADVISER It may be valuable for you to talk to a financial adviser before you decide on which annuity or on which format your retirement benefit will take. The question, however, is how one chooses a financial adviser.

7 7 of 10 Financial advisers usually fall into two categories: i) Agents (also called representatives) are those who are linked to a specific insurance company and usually sell only the products of that company; or ii) Independent brokers who can advise you on the products of various insurance companies. Many people choose their financial advisers on the recommendations of their friends or family members. Your financial adviser must, however, be qualified, knowledgeable and reliable. Your financial adviser must also understand your personal circumstances and needs. Please note that the Trustees are not in a position to recommend any adviser or group of advisers. You must make your own choice of adviser. I f, however, you are unable to decide, you can contact the local office of any of the larger insurance companies. Ask to speak with an agent of that company. Alternatively you can make use of the services of an independent broker. Independent brokers can be self-employed or belong to one of the larger co-operative financial services companies, who employ a large number of brokers. Financial advisers are remunerated by means of a commission, as laid down in the insurance act. This remuneration is with respect to the work they do for you and the expertise they offer. You are thus advised to gather comprehensive advice from your adviser. You may ask that your adviser level of commission he or she earns. 9. ADDITIONAL INFORMATION 9.1 How do I inform the fund administrators that I intend withdrawing from the University of Stellenbosch Retirement Fund? When you resign from your position at the University you must complete two forms. The one is the University s resignation form and the other is the withdrawal claim form. Once you have completed the withdrawal claim form, the Human Resources Division will send it to the Fund s administrators, Alexander Forbes Financial Services. Both forms are available from the Human Resources Division.

8 8 of When can I expect my retirement benefits to be paid out to me? The administrators will attempt to pay your retirement benefits on your last day of service, but after the following procedures have been completed: i) Your retirement claim form has been completed; ii) You have indicated the annuity product you wish your funds to be paid to (if you have chosen buy an annuity); iii) Your claim form has been checked by the Human Resources Division; The administrators have calculated your benefit, including the investment income you have earned; and iv) A tax directive has been issued by your local tax office. Generally the reasons for delays in the payment of benefits are that the claim form has not been filled in completely or the Receiver of Revenue will not issue a tax directive because of difficulties with the member s tax returns. 9.3 Can I take a portion of my withdrawal benefit as a single amount and transfer the balance to a preservation fund? No. The only circumstance in which it might be allowed by the Receiver of Revenue is when a portion of your withdrawal benefit is used to settle a debt to your employer in terms of Section 37D of the Act on Pension Funds. In such cases the cash portion used to settle the debt will be regarded as your one allowed withdrawal under the preservation fund, and will also be taxable. 9.4 May I cede a portion of my withdrawal benefit to a third party? No. In terms of the pension fund law you may not cede any portion of your withdrawal benefit to third party. The only exception to this rule is a guarantee that a fund might offer for a housing loan, and a divorce order issued by a court that includes your Fund Benefits. 9.5 If my withdrawal benefits are not paid in time will I receive any interest on them? Yes. The Trustees have decided that interest must be paid on late payment of benefits. This rate is linked to 32-day fixed deposit rates available at the larger commercial banks.

9 9 of Tax on Unclaimed Benefits Members should note the implications of General Note 35 issued by the South African Revenue Services (SARS). In terms of GN 35, which deals with unclaimed benefits, a benefit not claimed for SIX months after the member s accrual date (i.e. the date on which the member left the Fund) will be regarded as unclaimed and the administrator of the fund must make application to the Receiver for an assessment. The Receiver presently levies tax on these unclaimed benefits at a rate of 40%. Withdrawals from a retirement fund are taxable unless they are transferred to another approved pension-, provident-or retirement annuity fund (subject to the requirements of the Income Tax Act). Thus, if a member plans to transfer his benefit tax-free to another fund, but takes longer than six months to give the instruction to the administrator of the fund, the administrator is obliged to advise the Receiver that the benefit has not been claimed, and the Receiver will tax the benefit at a rate of 40%. Neglect to exercise the transfer options within six months of the date of withdrawal, will result in the member forfeiting the option of deferring the taxation of his/her withdrawal benefit to a future date. The benefits of such members will be fully taxed as single-amount cash withdrawals. If a member s unclaimed benefit has been taxed at 40% and the member later comes forward to claim his benefit in cash, a tax assessment will again be issued. If the member s average tax rate was more than 40%, the administrator will be obliged to deduct the tax due from the member s benefit before the remainder can be paid out to the member. The opposite is also true: where the member has paid too much tax, the member must contact The Receiver to reclaim the tax owed. In conclusion, members should take note that if the withdrawal amount has not been received within the prescribed time framework, their benefits will be subject to penalties and interest when they are taxed. If the employer or the member neglects to provide the required withdrawal instruction to the Fund, it will have a negative effect on the Fund, especially where the potential penalties and interest for the neglect to apply for a tax assessment and pay the tax in the time prescribed by The Receiver, are greater than the

10 10 of 10 member s benefit in the Fund. The balance of these penalties will have to be carried by the Fund, which will, thereafter, have to claim the loss incurred back from the party incurring it. 10. CONCLUSION You might perhaps feel inclined to spend your withdrawal benefit on a new car or a holiday. Remember, that this benefit represents an important element in your future financial security. The Fund, however, advises you to retain your withdrawal benefit so that you can afford a comfortable and financially stable retirement. You are also encouraged to obtain the advice of a reliable financial adviser about the investment of this benefit for your retirement. NOTE This guide is not a complete and comprehensive document. Rather it is compiled to point out some important aspects concerning your retirement under the University of Stellenbosch Retirement Fund. The guide will be updated from time to time, but may not, at certain stages, be fully up to date. Your financial adviser will be available to inform you of the latest changes in legislation. The guide describes various benefits offered under the University of Stellenbosch Retirement Fund. The benefits enjoyed by members under the Fund are described in the registered Rules of the Fund. Although everything possible is done to ensure that this guide is accurate, the Rules of the Fund are decisive in the event of any dispute. This guide does not cover the independent Group Life Insurance Scheme of the University of Stellenbosch. July 2008 RM0379-Retirement Fund Guide to the Withdrawal Process (excluding retirement on pension) (January 2011)