MONEY BASICS with MARTIN HESSE

What you need to know about retirement funds

DO YOU know that all retirement funds are governed by the Pension Funds Act and subject to a unique set of regulations designed to protect you and your dependants?

TYPES OF RETIREMENT FUNDS

You get occupational funds (funds linked to one’s employment), preservation funds and retirement annuities (RAs).

♦ Occupational funds may be:

a) Defined-benefit funds, in which your benefit is guaranteed according to a formula that takes into account what you earn and your years of service (a good example is the Government Employees’ Pension Fund); or

b) Defined-contribution funds, in which there is no guaranteed benefit when you retire. The amount owing to you will be your total contributions plus investment growth on those contributions. Most private-sector funds are now of this type.

Occupational funds may be pension funds or provident funds. Traditionally, provident funds were funded with after-tax contributions, but recent legislation changes have ensured that, from March 1, 2021, there is virtually no difference between a pension and a provident fund. They may also be either stand-alone funds (a company- or union-specific fund) or umbrella funds, which house a number of employers in a single fund.

♦ Preservation funds are not linked to your employment. They are specifically designed as an investment into which to transfer your retirement benefit when you change jobs.

♦ RAs are like “private” pension funds. (See article explaining RAs on page 10.)

MANAGEMENT OF THE FUND

The fund must have a board of trustees, and occupational funds must have employee representation on the board. The trustees must act in your best interests and manage your money prudently. Funds usually outsource day-to-day administration to retirement fund administrators. This involves keeping tabs on members, their contributions, the investments and fund balances.

Your fund is required by law to provide you with an annual statement of your balance, and it should also indicate whether you are on track to retire comfortably. New regulations require funds to communicate with you through counselling or written information when you begin or leave a job to ensure you are fully aware of your options and the possible tax and other consequences of those options.

Your employer does not have direct access to the fund. However, on leaving your job your employer may withhold some or all of your benefit as compensation if you have been found guilty of theft or fraud against the company.

CONTRIBUTIONS

Your contributions to a company pension or provident fund will come off your salary or wages. Your contribution may be supplemented by a contribution from your employer, which is considered a fringe benefit for tax purposes. All contributions to retirement funds, including any you make to an RA, are tax-deductible up to 27.5% of your income up to R350 000 a year.

Your employer is required to pay contributions over to the fund each month. If it is not doing so, you need to complain to the Pension Funds Adjudicator (see page 20). The Act requires that the fund’s board of trustees is responsible for the collection of contributions from employers.

INVESTMENTS

The Pension Funds Act places limits on investments into higher-risk assets such as shares. A balance needs to be struck between investing too cautiously, in which case your money won’t grow sufficiently, and taking on too much risk, whereby you could lose money.

You may be offered a choice of underlying investments, failing which you will be put into a default portfolio, which would ideally be suitable for the average member. Many funds adopt a so-called “lifestage” approach: you are placed in higher-risk highgrowth investments when you are younger, and then transferred across to safer, lower-growth assets as you approach retirement, so that you are not faced with a sudden loss at the end of your career from which you can’t recover. Retirement-fund portfolios are not subject to any form of tax on capital or returns.

BENEFITS

As a member of a pension/provident fund, you may not access your accumulated benefits unless (a) you quit your job or (b) reach retirement age. On withdrawing your benefit, there are different tax structures depending on whether you are changing jobs or have reached retirement. The tax is much heavier on a withdrawal when you change jobs, and any adviser will strongly advise against “cashing in”. (See articles on pages 6, 8, 12 and 19).

If you die in service, your benefit plus any group life insurance payout will be paid to your dependants and/ or nominated beneficiaries (people you have named on the beneficiary form). Who gets what is determined by the board of trustees after they have assessed who is in most need of the money.

For example, if you have children from a previous marriage, they are likely to be considered, even if you have not named them as beneficiaries.

Your savings in a retirement fund do not form part of your estate.