Understanding preservation funds

A preservation fund is a savings vehicle into which you can transfer your retirement savings from a retirement fund (pension or provident fund), with the aim of preserving funds for your financial well-being in retirement.

This vehicle is primarily used when people resign or change jobs, which then becomes a tax-free transfer from your existing retirement fund into a preservation fund of your choice. Preservation can either be in-fund with your retirement fund, or by transferring your money to any approved private preservation fund. This initial transfer is tax-free, however, there are costs associated with any preservation fund and tax is applicable to any withdrawals.

Once your retirement savings are transferred into a preservation fund, a few options are available to you:



1. Investment/fund choice

While you are invested in a preservation fund, you may choose how your funds are invested from the available options. Even though you cannot make any additional payments or contributions, your invested amount will continue to grow based on the chosen investment option. The investment options are from various private asset managers, hosted by the approved preservation fund.



2. Withdrawals

When transferring your retirement savings into a preservation fund, you have the option of doing a partial or a full withdrawal of funds, either upon the initial transfer in, or any time within the allowable withdrawal period for the respective preservation fund. It is important to note that tax is applied to each withdrawal, thus it is necessary for individuals to ensure that their tax affairs are in order, and they are in good standing with the Namibia Revenue Agency (NamRA).



3. Upon retirement

Individuals may retire out of a preservation fund from anywhere between the ages of 55 and 70 years old. This means that one-third of their retirement savings will be paid to the individual in cash, which is tax-free, while the remaining two-thirds will be used to purchase an annuity, which will provide for a taxable monthly income.



Securing your financial future

The main reason for preserving your retirement savings is to ensure that your financial future is secure. During our working lives, most people earn a salary for about 25 to 35 years. In that time frame, most people contribute anywhere between 10% and 20% of their salaries towards their retirement savings. For example, Jane earns N$1 000 per month, of which she contributes N$200 (20%) towards her retirement savings (not including expenses/fees). If she continues to contribute the same monthly amount for 25 years, with an average of 8% growth per year, she will have savings of N$192 284 at the end of 20 years.

Remember of that amount, only one-third (N$64 095) will be paid to you in cash, while two-thirds (N$128 189) will need to purchase an annuity for income. Based on your salary and your monthly contributions, do you believe that you will have enough retirement savings when it is time to retire?

Let’s take an example that Jane changed jobs after 15 years of work and took her money in full as a lump sum after tax to settle debt. Thereafter, Jane started with the same N$200 per month contributions for the next 10 years until retirement. After 10 years, she would only have a total of N$36 887 at retirement.

Even though you cannot make additional contributions towards a preservation fund, would Jane have been in a better position at retirement if she preserved her funds after the first 15 years?

The goal is for your retirement savings to support you during your non-working years, which could last 20 years or more, depending on your life expectancy. Imagine having to live off 10% to 20% of your salary contribution for 20 years after retirement, would that be enough to live on? Jane earned N$1 000 while working, do you believe that the N$192 284 (of saving for 25 years) or the N$36 887 (of savings for 10 years) would be more beneficial for her in retirement?



Small, but significant

Then there is also another 'small, but significant' thing called inflation to consider, which keeps reducing our purchasing or buying power. A good example is the cost of bread and milk 10 years ago versus today. How much do you think these basic items will cost in future when you retire? This is where we need both savings and investment growth to assist in achieving a reasonable retirement pot.

So, here is the challenge: Why do we only consider our immediate needs and not our future needs? We withdraw our future savings for our current 'emergency' needs, thus reducing our chances of saving something substantial for the future.

Did you know that the current old-age pension stands at N$1 600 per month, with the possibility of further increases in the future. Would this alone be enough for you to sustain yourself in retirement? Would it not make sense to preserve your funds to give yourself a better future when you are retired?

For most people, retirement savings tend to be the largest bucket of savings that they accumulate during their work life. The statistics are extremely alarming, with less than 6% of the population able to sustain their lifestyles in retirement.

Preservation promotes long-term savings and investing, which is not necessarily exercised by the general population, thus promoting the dependency on government, and creating a financial burden on families.



By default, some benefits for preserving would be:

• to increase your retirement savings to allow for a better pension income in retirement, thus reducing your financial stress in future.

• to defer tax payable on lump sum withdrawals by only paying the tax on the income received in retirement on the two-thirds. Is that not better than paying anywhere between 18% to 37% tax on a lump sum withdrawal from your preservation savings?

The overall benefit of preserving is to allow you to be in a better financial position when you retire by making financial sacrifices today, for the benefit of tomorrow.



**Isaack Veii is the head of distribution and retention in the corporate segment at Old Mutual Namibia.