Planning Perspectives with Palesa Tlholoe

Financial planning with employee benefits

EMPLOYEE group benefits remain an area of mystery, not only for employees, but for human resources personnel. This lack of clarity, coupled with the many compliance regulations, can make it difficult to plan financially using these benefits. They are the only benefits that many South Africans will ever get close to for legacy or wealth creation.

Employee benefits, such as retirement savings, aren’t used the way they were intended because of this same lack of understanding. This perpetuates the narrative that a mere 6% of South Africans retire comfortably. Understanding these benefits, and factoring them into your personal financial plans can present many opportunities for wealth creation.

What are employee benefits?

Employee benefits are financial benefits that employers offer their employees and their families. Examples include group life cover, disability cover, severe illness cover, funeral cover, pension or provident fund savings, and education benefits for the employees’ children. These benefits are usually a percentage of each employee’s salary to make it equitable, fair, and affordable for everyone.

The advantage of group benefits is the lower administration cost due to the economies of scale (costs are spread over a large number of people). The challenge, on the other hand, is that benefits aren’t personalised to each individual employee’s circumstances. In other words, they may not resolve all your needs.

How to get the most value from your benefits

● You need to know your benefits! Ask for your benefit statement after you’ve been added to your employer’s group scheme.

● Consult a professional financial adviser or planner. Show the adviser your group benefit statement so that he or she can analyse your benefits and link them with your current personal financial portfolio as well as your financial needs. This will help you create a clear picture of what your current financial position is, where the gaps are, and how you can close them.

● Your circumstances may change along the way. Knowing what to do to ensure that your plans remain intact and executable is a critical step. An example would be transferring your pension benefits to a preservation fund, rather than taking a pay-out when you retire or resign.

● Just like any other financial benefits, employer benefits are taxed when paid out. Factor in the tax implications when planning on leaving your current employer. You can avoid paying tax by transferring to a preservation fund or your new employer’s fund when you change jobs. Unfortunately, an exit due to death is out of your control. A professional can help you factor in the taxes so you know what your family will get after taxes have been paid.

● Top-up your life cover in alternative ways (usually through an individual insurance product) if the cover is not enough to fit in with your estate planning.

● Resist the temptation to cash in your funds in for purposes that they weren’t intended for. What commonly happens is that when someone leaves his or her employer after they’ve resigned, group benefits become a casualty, especially if they’re not linked to their long-term plans.

Special legislation

Your employer benefits are governed by different laws to those of individual plans. Group funds have trustees who are appointed and entrusted to make decisions on your behalf, both in terms of running the scheme and how pay-outs are done.

Your financial planner will give you an idea of how trustees work, possible timelines, which are often longer than on individual benefits, and how you can mitigate any inconvenience.

With the help of a Certified Financial Planner, your employee benefits can be used effectively to create wealth and leave a meaningful legacy for your loved ones.