Preservation funds are a great idea for anyone wanting to preserve their retirement savings, without having any tax deducted, when they depart from a job, whatever the reason, including resignation or retrenchment.
These funds are great for everyone with one big exception - the civil service. Over the past few years civil servants have been offered a number of different and attractive retrenchment or severance packages while the rules of Government Employees Pension Fund and tax laws have been substantially altered.
We have received numerous queries since we published a warning to civil servants in the Personal Finance Scrapbook series preservation fund article. Personal Finance warned that when they take a severance, discharge or resignation package they should NOT put their retirement savings into a preservation fund.
The reasons are quite complex. The structure of civil servant packages gives them access to their full actuarial value provided the retirement savings are transferred to another approved retirement fund.
The approved fund can be another retirement fund or a retirement annuity fund offered by a life assurance company.
A preservation fund is not an approved fund because a large portion of the benefit paid to civil servants is considered as a "member contribution or own contribution". But the money will only retain the tax free benefits to which civil servants are entitled at retirement if the money is put into a retirement fund where member contributions are acceptable.
Preservation funds can only accept retirement fund transfer benefits and not member contributions.
As a large portion of the departure package of civil servants is defined as an "own contribution" they will retain the tax free benefits at retirement if their money goes into another fund (say of a new employer) or into a retirement annuity fund.
The retirement packages of civil servants are complex, particularly with the change to their tax free status on lump sums (until March 1, 1998) and the various severance packages on offer.
Any civil servant resigning, discharged, taking a severance or early retirement package, or retiring should get professional advice.
The complexities of civil service retirement are covered in a chapter in the 1999 edition of the book I co-authored with Magnus Heystek, titled Retirement - the Amazing and Scary Truth, where all the issues and calculations civil servants need to take into account in structuring their retirement packages properly are dealt with.
In the meantime do not put your money in a preservation fund if you are a civil servant: you may only discover how much it has cost you years from now.
If you are a civil servant and you have been incorrectly placed in a preservation fund, demand from the company providing the preservation fund that your position be rectified.
The correction will include making an appeal to the taxman to correct the situation.
Apart from ignorance of some financial advisers on this issue, the other reason for this poor advice may be the higher commissions paid on preservation fund investments over retirement annuities.
Preservation funds are good vehicles for ordinary mortals but you must be aware of their limitations. Firstly you are only allowed one withdrawal. This includes the R1 800 you can take tax free from your retirement fund transfer benefits. If you run short of money you cannot access your retirement savings in the preservation fund until you retire.
The retirement date is the date which applied in the fund from which you originally transferred your money. So if the your retirement date was 65, this becomes the date in your preservation fund. Against this you can make the maturity (or retirement date) 55 in a retirement annuity fund. If at the age of 55 you do not want to retire from the fund you can keep extending the retirement date until you are 69. You are not allowed to be a member of a retirement annuity fund after 69.
Another catch with a preservation fund is that there are two types: preservation pension funds and preservation provident funds. If you are in a pension fund you must transfer to a preservation pension fund. If you are in a provident fund you must transfer to a preservation provident.