Benefits 101 ·1 Oct 2023

Retirement Planning 101: Navigating Your Options

Retirement Planning 101

Well the problem started because of something that is actually a good thing – due to advances in healthcare and healthier living (such as fitness and stopping smoking) we are living longer. In 1990, average life expectancy in South Africa was 62 years. If the retirement age was 60, there was only 2 years that the average pensioner was drawing a pension from their pension fund. In 2020, average life expectancy had moved to 64, so the number of years’ that a pension fund needed to pay its members a pension (on average) had doubled. If you imagine that you might live to 80 or 90 years old, your fund will need to last for 20 or 30 years’.

In response to this increase to our life expectancy, employers no longer provide a pension that guarantees pension payments based on your salary (because it would be unaffordable for them to finance) but have shifted to a contribution model where the employee builds up their own retirement fund while they are working.This means that when you retire, you will have access to the money that you and your employer contributed to your retirement fund, plus the investment return you have earned on these contributions, less the fees and costs charged.

This change to defined contribution funds means that if you leave your job before you get to retirement age, you can take your money with you – either to transfer it to your new employer’s fund or your own private fund (such as a retirement annuity or preservation fund; see more about these types of funds below). The downside of this change is that if you live for a long time, and you haven’t saved enough, you really can run out of money. Your medical costs are expected to go up as you get older, and no one really knows how long you can work or how many years your money needs to last. If you only start contributing to a retirement fund when you are 30, you retire at 60 and you live until 90, you will only have 30 years to save enough to last you for the next 30 years.

The Basics of Retirement Funds and Tax Savings

Retirement funds are regulated by the Pension Funds Act, which specifies how much of your fund can be invested in shares and how much can be put offshore (amongst other things). However, because you can unlock a tax deduction if you invest in a retirement fund, it makes them more tax efficient than other methods of saving (like unit trusts). Up to 27.5% of your income, up to a maximum of R 350,000 per tax year is tax-deductible. This means you pay less income tax if you’re making contributions to a retirement fund – you are effectively saving the tax you would have paid on the value of your contributions if you took this money into your own hands.

Example Calculation: No Retirement Fund Contributions

Example Calculation: R2500 Retirement Fund Contribution

So it actually only costs you R1,840 to put R2,500 away towards your retirement savings!

Secondly, the returns earned (i.e. your growth) within your retirement fund are not subject to income, dividends or capital gains taxes, so within the fund is a “tax-free” environment. The downside of retirement funds is that unlike savings accounts or unit trusts, other than in a few specific circumstances, you will not be able to withdraw money from a retirement fund before you retire or in the case of a retirement annuity, when you reach age 55.

There are different types of retirement funds: pension funds, provident funds, retirement annuities and preservation funds. Your employer might have selected either a pension or a provident fund as a benefit for its employees, in which case it's probably compulsory for you to contribute to it. You can also take out a private fund (a retirement annuity) in your own name with a financial institution which you can contribute to, or you can do both. There are differences between the different financial companies and the options they offer regarding how they will invest your contributions.

Fund Types: Pension & Provident Funds

Membership of a pension or provident fund might be a benefit provided by your employer. But these funds are actually independent legal entities and are managed by a Board of Trustees. The Board must represent their members’ interests and are responsible for ensuring that your money is invested wisely. At least 50% of the Trustees will be elected by the members of the Fund (generally every four years), so look out for communications about Trustee elections for your Fund and participate - make your vote count! Some companies have their own funds, whereas others have joined an industry or “umbrella” fund (where a number of companies have joined a central fund).

• An important aspect of a pension fund is that when you retire, you will have the option to take up to one-third of the total amount as a cash lump sum. The balance must be invested in a type of an annuity, which will pay you an income (i.e. a pension).
• The main difference between pension funds and provident funds used to be that when you retired from a provident fund, you could withdraw 100% of your fund as a cash lump sum. Although this still applies to any “old” money you might have invested in a provident fund before 1 March 2021*, it has fallen away for money invested after this change in the legislation.
• The withdrawal of up to one-third of your fund value will be subject to tax according to a scale (see table below).

2022 tax year (1 March 2021 – 28 February 2022)

Important Note: These rates of tax apply to any money that you withdraw on retiring from a retirement fund or receive as a severance package due to retrenchment in your lifetime. So, if you have been retrenched (after the table came into effect in 2011), and received say, R 200,000 as a severance package, that would not have been taxed (as it falls within the first R500,000). However in terms of this table, now you only have R 300,000 left that you can withdraw on retirement without any tax being deducted.

• The remainder of the fund that you receive as monthly pension income will also be subject to tax and is treated in the same way that your salary is taxed (the standard income tax tables apply). However as a retiree, you will have the benefit of being able to manage how you draw this income to stay at a reasonable tax rate. If you are 65 and older, you also benefit from lower tax rates.

Whether you are a member of a Provident or a Pension fund, if you leave your employer before you retire, you can either leave your fund balance with your ex-employer’s pension fund, transfer it to your new company’s fund if they offer one, or open a preservation pension fund to let your savings continue to grow. You can also move it to a retirement annuity and continue with your contributions into the new fund .

Fund Types: Preservation Funds

If you have been a member of an employer’s pension or provident fund and you leave your employer for any reason, you can transfer your funds to a preservation fund with a financial institution in your own name.  You can then transfer your retirement savings into this fund.  You can choose how you want your preservation fund to be invested from the options available, so it can continue to grow.  You can make one withdrawal from the fund before you retire, so having a preservation fund is a good safety catch for emergencies, although be aware that such a withdrawal will be taxed according to the tax table below (as published by SARS every year)   

Tax Table - Withdrawal Benefit (before retirement)

2022 tax year (1 March 2021 – 28 February 2022)

You can retire from a preservation fund from the age of 55 and transfer it into an annuity to provide you with an income.  On retirement you can withdraw up to one third of your fund’s value in cash, and as the first R 500,000 will not be subject to tax, withdrawing R500,000 is often a good option, especially if you need to settle a bond or other debt.  However, it's a balancing act, as the higher the value you can transfer into your annuity, the more you will have to grow and to be the base for your pension or income.

Tax Table: Withdrawal on Retirement / Death Benefits / Severance Benefits

2022 tax year (1 March 2021 – 28 February 2022)

Important Note: These rates of tax apply to any money that you withdraw on retiring from a retirement fund or receive as a severance package due to retrenchment in your lifetime. So, if you have been retrenched (after the table came into effect in 2011), and received say, R 200,000 as a severance package, that would not have been taxed (as it falls within the first R500,000).  However in terms of this table, now you only have R 300,000 left that you can withdraw on retirement without any tax being deducted.

Click here for more information about Pension & Provident Funds and Retirement Annuities.

Fund Types: Retirement Annuity (RA)

A retirement annuity is a type of retirement fund that you can open with a financial company in your own name.  Unlike a preservation fund, you can make ongoing contributions to it, so if your employer does not have a pension or provident fund for you to join, having an RA will allow you to enjoy the tax deduction on your contributions.

You might also want to top up your pension or provident fund contributions if there is a limit on how much you can contribute to your employer fund by taking out an additional RA.   With an RA you can choose how you want your funds to be invested from the options available.  Because they are an individual fund, RA’s generally have higher fees than employer pension or provident funds, and it's worthwhile paying close attention to these costs.

Practical Tips - Good to know!

1. If your employer offers a retirement fund as a benefit, find out all about it; 
1. Find out if you can increase your contributions to maximise your savings and benefit from the tax deduction (up to the threshold of 27.5% of your income) and when you are allowed to make changes to your contribution %.  
2. Also find out if you can flex the base (your pensionable salary) on which your contribution % is calculated (so you can contribute more while benefiting from the tax deduction). 
3. The tax deduction that applies to contributions to retirement funds means that you are saving the tax you would have paid on this money and putting it all into a tax-free environment, where it can grow.  So, it’s in your interests to save as much as you can, up to the tax threshold of 27.5% of your income (up to a maximum of R350,000) 
4. Once you have worked out your budget, flex your contribution and pensionable salary up to the tax threshold or as much as you can manage.   As your circumstances change, you may need to reassess and increase or drop the value of your contribution, but don’t let that hold you back.  It's worthwhile contributing as much as you can for as long as you can. You can make adjustments as your life circumstances change - and Bento is here to help you make this as easy as possible. 
2. Find out if there are choices as to how your money will be invested.  Usually the Trustees will have researched these options very carefully.  Retirement funds are invested relatively cautiously because of the legislation. If you can select from different investment strategies (ranging from lower to higher risk investment structures) and assuming your retirement is some years away, don’t be afraid of higher risk (higher equity) options that could give you better growth and returns over the longer term.
3. Once you have decided on the best option regarding how to invest your retirement fund, stick with your plan.  The nature of investments and markets is that sometimes they do well and sometimes they do not.  Don’t make changes to your option or portfolio just because it has had a bad patch; if it recovers then you could find that switching has cost you in the long run. Rather make your financial decisions based on a thorough assessment, and if you have a financial advisor, discuss the options with him/her.
4. Find out if there is a way to reduce the costs or fees.  If there are insurances associated (such as life cover and disability insurance) with the fund, find out whether you can adjust the level of this insurance cover.  Make sure that the insurance cover is set at the right level for you, and that you are not paying for insurance that you don’t actually need.  Every saving you make increases the amount that you can put towards your retirement.
5. If you don’t have access to a retirement fund through your employer, then open up your own retirement annuity with one of the established financial companies.  The decisions you need to make will be exactly the same as for an employer fund, but you will probably have more choices.  You will automatically be issued with a tax certificate and the tax deduction on your contributions will be taken into account by SARS when calculating your tax. To benefit from the tax deduction before the tax season, ask your employer if they are willing to capture your personal contributions on their payroll so that you benefit from the tax saving each month. Bento will soon allow you to add your own RA to your Bento portfolio so your net salary is automatically calculated taking your contributions into account. 
6. If you leave your employer, it's important to preserve the funds you have contributed to your retirement fund. It will be very hard to save up the same amount again while adding additional savings to the fund and to get to a position so you can comfortably retire. If you transfer your fund to a preservation fund, you will be able to make one withdrawal and it's up to you to decide how much to withdraw.  Such pre-retirement withdrawals will be taxed according to the tax table below (which is published by SARS each year here).  However, this should be a last resort as any amount that you withdraw will be very hard to replace.  

Tax Table - Withdrawal Benefit (before retirement)

2022 tax year (1 March 2021 – 28 February 2022)

• If your income and monthly budget are under pressure and you are worried you can’t keep up with the contributions, adjust  your  fund contributions or  cease making contributions (if you are contributing to an RA) until you have got your income back on track. The decision to sacrifice your retirement savings is going to come at the cost of your older self, and is not to be taken lightly.
• Lastly, it is very important that you complete a “nomination of beneficiary form” stating who your fund money should be paid out to in the event of your death.  Keep this up to date as your family situation or your beneficiaries change.  As long as you have nominated beneficiaries, your retirement fund money will be transferred to them without it becoming part of your estate, which means that estate duty (tax on your assets that you pass on after your death) and executor’s fees do not apply.  If you don’t have any beneficiary nominated, then your fund will get wrapped up as part of your estate, so estate duty and other fees will apply.  Usually estates take a lot longer to sort out, especially if there are any complications with your will….  And while we are on this point, if you would like to speak to someone about drawing up a will, Bento can arrange for a qualified advisor to get in touch with you.

How can Bento help?

It's not surprising because we are bombarded with news about how few people cannot afford to retire but it’s a struggle to find practical advice about what to do about it. And if you have a real question, you might find that no one is prepared to answer you directly because in terms of the legislation, financial advice can only be provided by certified financial advisors. There is a good reason for this, as unqualified advisors who do not understand your entire situation could easily say things that make you go in an incorrect direction which could have very serious consequences.

Bento can help by giving you a great general understanding about what is available and how to go about planning and investing for your retirement. In addition, if you would like personal financial advice, you can contact us. so that a Bento independent financial planner can call you – he or she will assist with a careful analysis of your situation and needs and will put together a financial plan for you.

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