Should I take my Flexi pension and invest in a business?

I have an old, Old Mutual Flexi Pension policy. This has been paid up for many years.

Next month I will be turning 55. I am self-employed and still working. This is not part of any work-related RA or pension fund. As the amount is not enough to sustain me by any means and more than R90 000, I would rather take the complete amount and invest it in business. I am aware of the tax implications. I am also aware of the one-third regulation. However, does it apply in this case? Also, should I settle any study debts from my children? Is there tax relief? Your advice is much appreciated.

The OM Flexi Pension policy is a retirement annuity of nature and therefore specific pension fund and tax legislation, referring to retirement annuities, applies.

The official retirement age in South Africa is 55. This does not mean that you have to retire at age 55. It merely means that 55 is the earliest you can opt to transfer your retirement savings into a post-retirement state or vehicle.

Retirement annuities do not allow for any lump sum withdrawals pre-retirement. The OM Flexi Pension policy has a maturity date, which provides you with retirement optionality. Three months after the maturity date, if you have chosen not to retire, your retirement annuity will automatically be transferred (tax-free) to the Max Investment platform. The Max Investment platform’s fee structure and unit trust fund choice will apply. The initial investment during/after the transfer remains a retirement annuity of nature. The RA is now however “open-ended” with no official end/maturity date. This discretionary end date now would only be the client’s chosen retirement date, or end date caused by death of the client.

Flexi Pension – Current options available:

1. Postpone benefits: Leave the Flexi Pension investment as is, until you become financially dependant on these funds. Ideally this would be the point where this investment (perhaps with others) ensures that you are sustainably financially independent. If you choose to leave the investment with Old Mutual after maturity date, make sure the underlying asset allocation and fund choices are appropriate for your risk profile and investment return objectives. Confirm and compare the OM Max Investment platform’s fee structure to competitors in the market. A Section 14 transfer option is available to you, if you find a more compelling administration function elsewhere, without penalty.

You can build on this existing provision by:

a) Postponing withdrawal and ensuring the existing investment grows optimally

b) Adding to your retirement savings via a dedicated and well refined savings plan from you financial advisor

2. Retire (apply/use benefits):

You have the option to (after age 55 and policy maturity) retire from this retirement annuity. If you choose to withdraw part of your retirement annuity, normally only a third is available to you in the form of a lump sum payout. This results in the remaining two-thirds to be commuted into a guaranteed life of living annuity investment.

As the investment amount is lower than R247 500 in value, the full amount can be taken as a lump sum. If you have any other retirement annuity under OM’s administration, it might look at the total “cumulative” value of these retirement annuities. I suggest first checking with OM to see whether you qualify for this exemption, before retiring from this product.

Normal retirement tax tables apply at withdrawal with the first R500 000 tax free (assumming you have not taken any gratuitous or retirement lump sums before). Take note that this R500 000 exemption is a life-time allowance, so future gratuitous and lump sum withdrawals will be seen as cumulative withdrawals and taxed accordingly.

I generally discourage investors to use saved up retirement provision to relief short-term cashflow stress, pay off debt or pay towards children’s study fees. A basic guideline prevails in that you can only help children financially, if you are 100% sure you will be financially self-sufficient in your old days. It is merely impossible to make up spent retirement savings that has been withdrawn. I would strongly suggest that you preserve your retirement capital, for that rainy day.

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