Retirement funds are either pension or provident funds. They are offered by companies to their employees. It is not compulsory to offer employees a retirement fund, but it makes sense to do so in order to attract and retain employees. If you join a company where a fund is already in place, then it is compulsory for you to join the fund if you are eligible.
You may have some questions about how retirement funds work.
Retirement funds are not as confusing as you might imagine
Think of a retirement fund as a savings vehicle – much like a savings account at a bank, a unit trust investment or as a savings policy with an insurance company. Your company pays money to the appointed fund/service provider each month to allocate and invest the money.
The money in your account should grow over time with investment returns. You become entitled to the money in your account (only) when you leave the company through resignation, dismissal, retrenchment, death, disability or at retirement. In a nutshell, this is the definition of a retirement fund.
What is the key difference between a pension and a provident fund?
Tax laws were changed in 2016 and since then, pension and provident funds are very similar. The only difference is that on retirement from a pension fund, you can take up to one-third of your account balance in cash and the balance must be used to provide you with a monthly income.
In a provident fund you take all of your account in cash, but you are not compelled to do so. You will pay tax on any amount you take in cash.
How much is contributed to my retirement fund?
The amount contributed to the fund depends on the rules of the fund. When a fund starts, the contribution rate is usually negotiated between the company and the employees, with advice from specialists in the field.
Some companies share the contribution with employees on an agreed basis. Nowadays, most employees pay the full contribution as part of their cost-to-company package.
The contribution is normally expressed as a percentage of salary. For example, you pay 15% of your monthly salary towards the retirement fund. The total contribution you and your employer pay towards the retirement fund is tax-deductible up to a maximum of 27.50% of your remuneration (maximum R350,000 a year). The contribution your employer pays is subject to fringe benefit tax.
The contribution rates on a fund can be changed at any time by agreement between the employees and the company.
When looking at the total contribution rate on your fund, check if the full contribution is allocated towards your retirement account or whether expenses are deducted before the money is allocated. For example, if the total contribution rate on your fund is 15% and 5% is charged for expenses then 10% is allocated towards your retirement.
These types of funds are called inclusive of expenses. A more transparent way of setting up funds is to state the contribution rate as exclusive of expenses. In other words, the expenses are paid over and above the stated contribution rate in the rules.
How is my money invested?
The retirement fund service provider and the trustees of the fund set the guidelines and options as to where the money can be invested. To protect your money, they have to follow guidelines in terms of the law as to how your money is invested.
The fund will usually provide several investment portfolio options. A financial adviser will assist the company to decide which portfolios or combinations will be best suited to the employees and will set this up as a default choice. Most funds will also give you the option to opt out of the default and make your own choice.
You should regard your investment in a retirement fund as a long-term investment. Do not panic when there is volatility and uncertainty in the markets. If you are closer to retirement, you should be in contact with your financial adviser to help you make the appropriate choices under these circumstances.
An important point to consider regarding investments is the cost of investment. Investment costs can severely affect your final retirement amount. One has to weigh the costs against the growth you earn.
Can I access my fund before retirement?
You can only access your fund before retirement if your employment with the company terminates. Usually, your employment terminates before retirement as a result of:
Your total retirement account is payable to you in the events above, whether you belong to a pension or a provident fund.
You may take all the benefit in cash, take some cash and transfer the balance to another approved fund or transfer all to another approved fund. Any cash you take is taxed. Amounts you transfer to another approved fund are not taxed.
The tax is calculated according to withdrawal tax tables which are much harsher than the tax tables used to calculate the tax when you retire.
Your retirement fund also becomes accessible if the company fund terminates. You will have the same options indicated above.
When can I retire?
In terms of Income Tax law, you can only retire from age 55 unless you are retiring due to ill-health.
Your company policy or employment contract will determine your normal retirement age. To retire before this date or after this date will be at the company’s discretion.
When you retire, you can take up a maximum of one-third of your retirement account in cash, while the balance must be used to provide a monthly income. On a provident fund you can take all of your retirement account in cash.
Any amount you take in cash, be it from a pension or provident fund, is taxed according to the retirement tax table.
What happens if I die before retirement?
The total amount in your retirement account is paid to your dependants and/or nominees and taxed according to the retirement tax table. The benefit does not form part of your estate and not paid according to your will.
The trustees of the fund make the final decision on how your benefit is allocated to your dependants and/or nominees as stipulated by the Pensions Fund Act. It is important that you complete a beneficiary nomination form and update it on a regular basis so that the trustees have a guideline as to who your dependents and/or nominees are.
Where can I get more information on the fund I belong to?
At the very least, you must ensure that you receive an annual statement showing all your benefits and contributions. Your employee representative or the personnel department should be in position to assist you or point you in the right direction to obtain information on your fund or answer any questions you have.
With the enhancement in technology, most service providers are now able to provide online benefit statements and investment reports. Take advantage of these facilities to enhance your knowledge and take responsibility for your retirement savings.
This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)
Retirement Fund Account Executive
FPM Employee Benefits
011 778 9300