Q Phuti from Pretoria asks:
I will be resigning from the public service at the end of June 2007. Please advise me on what I should do with my pension. Should I open a retirement annuity, according to this week’s article? The article also spoke of the split, which is transferring half of the money into the annuity and cashing the rest. Is it possible in the public sector? Will I be able to do this without being taxed for the half that is transferred to the retirement annuity?
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A Metropolitan Odyssey replies:
Phuti is a member of the Government Employee Pension Fund (GEPF). All retirement funds are governed by fund rules and when a member retires, resigns, dies or becomes disabled, the fund rules will have to be consulted. The GEPF fund rules are unique. Generally, all pension and provident funds will allow the member, upon resignation, to transfer a portion of the fund benefit to an approved retirement fund, which will be tax-free, or to take a portion of the fund as cash, which will be taxable. The GEPF does not allow the member to choose a combination of the two options. Therefore, Phuti will not be able to receive a portion of the benefit in cash and transfer the rest to the retirement annuity fund and will, therefore, have to choose between the two options. The choice of preserving the pension, for example in an RA, will result in a larger payout.
If you take the cash
The first option is to receive a cash resignation benefit. The rules determine that an amount equal to 7,5% x final salary x years of pensionable service will be payable to the member. The cash benefit will be subject to taxation. The first R1 800 will be tax-free and the rest will be taxed at the member’s average tax rate. The danger in this option is that the funds are used to meet short-term objectives and that he or she does not replace the retirement provisions lost.
If you preserve the pension
The second option available is to transfer the fund benefit to an approved retirement fund. The retirement annuity fund is an approved retirement fund for this purpose. The transfer amount will be equal to the cash resignation benefit, plus the difference between that benefit and the actuarial interest in the fund. Therefore, the amount transferred should be greater than the cash resignation benefit. The transfer to the approved retirement fund will be tax-free. Taxation will become a consideration only once the member reaches retirement — any tax-free portions that the member would have had at retirement from the GEPF will be lost because of the transfer made. This option will ensure that the retirement provisions remain intact because the rules of the retirement annuity fund provide that the member cannot access the funds before reaching the age of 55. The member will continue to benefit from the future growth on the fund until retirement, which will add to his or her financial independence after retirement.
Teenage banking
Q Rudy van de Elst asks:
I am writing on behalf of a few enthusiastic teenagers who want to save. They earn small amounts of cash delivering pizzas, fixing cars and cutting grass. All of them are from a poor background and are desperate to save for a better future. But, without resorting to mattresses, what do they do?
A M&G replies: All four banks offer debit cards for teenagers with no monthly service fees and most offer some free transactions.
Nedbank offers a NedSave Account designed specifically for six to 17-year-olds. A R10 minimum opening deposit is required and a R10 minimum monthly balance must be maintained. It is a debit card, which is linked to internet banking. There are no monthly service fees and the first cash deposit, balance inquiry and statement is free each month.
Absa offers a transactional account called MegaU, which is linked to a debit card. There are no fees for point-of-sale transactions, airtime top-up, cellphone banking subscription or cash deposits up to R500.
FNB offers the Future Account for children up to the age of 13, which includes two free withdrawals a month and 15% discount on Lego and educational toys. FNB Fluid Account is for ages 13 to 18 and includes two free debits a month and no subscription fees for online banking or cellphone banking. It offers various discounts, including movie tickets.
Standard Bank’s (sum)1 is divided into a spending pocket and a savings pocket for longer-term savings, which pays interest. The first four debit transactions each month are free. The first four AutoBank cash deposits each month are free, with no internet banking subscription fee and unlimited free electronic balance inquiries.
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