MONEY CLINIC | If I moved to Europe, what are my best options regarding my SA pension fund?

A Government Employees' Pension Fund (GEPF) member considers resigning and emigrating to Europe, and is concerned about how the rand-to-euro conversion will impact her pension payout; she asks whether she should purchase a living annuity from the preservation fund without triggering a tax liability. 

She writes:

I am 60 years old and a member of the GEPF with about 34 years of pensionable service. The GEPF is a defined benefit fund, and under normal circumstances, I understand that it would be preferable to retire rather than resign.

My husband and I are considering relocating to Europe and are concerned that with the rand’s inevitable downward trajectory over the long term, if I opt to retire from the GEPF, my monthly pension payouts (once converted from rand to euro) will lose too much value over time.  

If I resign from the GEPF, I will be able to place the full R5.2 million of actuarial interest in a preservation fund, thereby avoiding paying tax on the full amount. (I do not intend to emigrate financially from South Africa). 

My question is whether I would be able to purchase a living annuity for the full amount from the preservation fund without triggering a tax liability at that point? My intention would be for the funds in the living annuity to be invested offshore for protection against the continued devaluing of the rand. The monthly draw-down would still be paid out in rand in South Africa and I would then have to pay taxes on the monthly income, which is fine. 

I would initially keep the amount I draw from the living annuity to the required minimum while my husband and I can still work, but I would need to receive a full pension from about age 65. 

Please let me know where the flaws are in our thinking in this scenario plan? In addition to our possible plans to relocate, we are also very concerned about the current corruption at the PIC, the imminent fiscal cliff and the possibility that EWC could be applied to pension funds.

Paul Leonard, Advisory Partner at Citadel Wealth Management responds:

To answer your question: Yes, you could transfer your actuarial interest to a preservation fund and then to a living annuity on a tax-neutral basis and draw a taxable income from the living annuity in rand in South Africa.    

You might consider taking a lump sum when you "retire" from the preservation fund. Given that you are a member of the GEPF, the portion of the retirement lump sum that is attributed to your pre-1998 period of membership is tax-free over and above the R500 000 tax-free lump sum that you are entitled to (on condition that you have not taken any other lump sums or severance benefits), whereas the pension that you draw in retirement, including the pre-1998 portion, is fully taxable as income.   

By moving out of the GEPF defined benefit scheme, you will in essence be moving the investment and longevity risk from the fund to yourself. There are numerous risk management strategies that reduce the possible negative impact of market and currency volatility, including, inter alia, asset allocation, phasing strategies, managing withdrawal rates, and currency hedging (especially if your future expenses will be in euros). These strategies can be implemented within your future living annuity. It would be worth getting advice in the context of your unique circumstances so that the underlying asset allocation of your living annuity can be viewed in the context of your overall financial portfolio as a couple.   

I agree with your remark that it would usually be preferable to retire with the defined benefit pension under normal circumstances. Given that you are planning to emigrate, there are pragmatic reasons for considering withdrawing from the GEPF, which make sense. However, I think it is worth mentioning that other GEPF members who, like yourself, feel uneasy about the bad press surrounding the GEPF and the PIC, but do not plan to emigrate, would be well served to spend some time familiarising themselves with the steps that have been taken to address the allegations raised in the media.  

Given my specialisation in retirement planning, I have done cash flow calculations and scenario planning over the years to compare the merits of multiple options for many retirees, including GEPF members who are wondering whether it is best to stay in or leave the fund. I am still fascinated by the fact that the best solution for one person does not automatically translate into the best solution for someone else. I strongly encourage retirees to have proper scenario planning done for them.

Questions may be edited for brevity and clarity.