In this article, I will be looking at three of the products that you can use to save for your retirement, namely: a Pension Fund, a Provident Fund and a Retirement Annuity.
A Pension or Provident Fund is what an employer offers his/her employees to help them save for retirement. Not all employers offer this and if not, or you want to save even more on your own, you can take out a Retirement Annuity.
Let’s first look at a Pension vs. Provident Funds:
In many ways they are similar, but one important difference is how they pay out when you retire:
• With a Pension Fund, you can get up to a third of the money in cash when you retire (and some of it may be taxed) and the balance you have to invest in a certain way to give you a monthly income.
• With a Provident Fund, you can get the full amount in cash (and some of it may be taxed) and then decide yourself where and how to invest so you can earn a monthly income.
If your employer offers you membership in either a Pension or Provident Fund, it is normally compulsory for you to join. Sometimes the employer will decide what portion of your salary will be saved (e.g. 10%), but sometimes you are given an option (e.g. minimum 5% and maximum 12%).
In most cases, you can also decide how much risk you want to take with your savings. I will focus on what “risk” is in Part 3 of this series.
As you save, your retirement savings account will increase. Sometimes the value will not increase for example when it’s not going well with the economy.
The value of what you have saved, is generally referred to as the “Fund Credit”.
When you resign and you’re not yet 55 years of age, you can do one of the following with your Fund Credit:
1. Take the full amount in cash (and possibly pay tax on it), which is not advised as you spend money that is meant for your retirement.
2. Take part of the amount in cash (and possibly pay tax on it) and transfer the balance to some sort of retirement savings plan.
3. Transfer the full amount to some sort of retirement savings plan (no tax will be deducted).
When you resign from your current employer and transfer either part or the full amount as described above, you don’t have to pay tax and your money will continue to grow until you retire.
There are three types of retirement savings plans that you can have the Fund Credit transferred to, namely:
1. To the new employer’s Pension Fund or Provident Fund (check this with your new employer);
2. to a Preservation Fund, which is basically like having your own “personal” Pension or Provident Fund”; or
3. to a new or an existing Retirement Annuity and if it’s a new Retirement Annuity, you can even add a monthly savings amount.
Let’s now look at a Retirement Annuity, or sometimes called an RA.
A Retirement Annuity is a good option for people who don’t have a Pension or Provident Fund as part of their salary package and want to save exclusively for their retirement. It’s also a good option if you have a Pension or Provident Fund but want to save even more. When a Retirement Annuity pays out, it pays out very similar to that of a Pension Fund which I described earlier.
When you take out the policy, you must decide at what age the policy will pay out to you. This age is called the “maturity age” and in most cases you can choose an age between 55 to 70 years.
The minimum age is 55 years so that you are not tempted to use the money before you have actually retired. You won’t have access to the money before you’re 55 unless you become permanently medically disabled.
Try to start saving for your retirement from a young age. A broker or the companies that offer Retirement Annuities, will guide you as to the minimum amount you can start with for example R200 per month.
Try and save at least between 10% and 15% of your gross salary. Gross salary means your salary before any expenses or tax are deducted.
If you are interested in taking out a Retirement Annuity, you will benefit from Part 2 in this series. I will focus on how this product works and what you must understand about a Retirement Annuity before you sign any application forms.
Stay tuned for Part 2 of this series.