Retirement – be clued up
Never underestimate the power of being clued up and learning the basics of retirement speak. These terms should get you off to a good start:
If you are working for a company, you’ve probably heard of this one. It is a compulsory saving tool set up by your employer. Your contribution is taxed, but your employer’s isn’t, so often the employer makes the contribution on the employee’s behalf. At retirement, the fund’s benefits are fully available in cash once the tax has been paid.
This is similar to a provident fund but is a retirement-saving vehicle largely used by self-employed individuals or those without a provident fund option at work. There is a tax saving, as contributions are subtracted from your gross annual income before tax is calculated.
At retirement, only a third of the capital can be taken as a lump sum.
The remaining two thirds must be used to purchase a compulsory annuity product such as an investment –linked living annuity or life annuity. Fund benefits can only be accessed at retirement (usually after the age of 55).
If you’re planning to change jobs, this is definitely one to remember. Preservation funds are literally meant to preserve capital. There are two types: a pension preservation fund and a provident preservation fund
If you belong to a pension fund: On resignation, you can transfer your funds to a preservation pension fund. No tax is paid when the money is transferred and the fund allows for a single withdrawal of any capital prior to retirement. At retirement, a maximum of one third of your capital can be taken as a cash lump sum, while the remaining two thirds must be used to purchase an annuity.
If you belong to a provident fund: On resignation, you can transfer your funds to a provident preservation fund. No tax is paid when your money is transferred, and the fund allows for a single withdrawal of any capital sum prior to retirement. At retirement, the total capital can be taken as a lump sum, or you can use the cash to purchase an annuity.
Defined-benefit retirement fund
This is a traditional pension fund that considers, among other factors, the number of years you have been part of the fund and your salary at retirement, to define the benefits accrued. The advantages are that you don’t take on the investment risk, and you can calculate the exact amount you receive at retirement (that is a percentage of your final salary). But the downside is that your pension may not keep pace with inflation because increases in contributions and benefits are at the discretion of the fund’s trustees. There are not many of these funds around today because most companies have moved over to defined contribution funds over the past few decades.
Defined contribution retirement fund
Contributions to this fund are paid by the employer and the member but, unlike a defined benefit retirement fund, the amount of money you receive on retirement is not guaranteed. The member decides where the fund invests her contributions and takes on the full investment risk. If the markets yield good returns, you may have a much higher pension at retirement but if they do poorly, you could stand to lose.