There are various ways that people can build their retirement savings, and this is information that many South Africans have very little to no knowledge about. It is important for South Africans to be more informed about retirement planning and the many options that are available in assisting them make better and smarter financial decisions about their future. At Ngidi SS & Co. our attorneys believe that it is important for every person in South Africa to know the similarities and differences between pension funds, provident funds and retirement annuities. Saving for retirement is a crucial part of estate and financial planning. The end goal should always be for an individual to connect their financial decisions to the life they are planning for. Having a retirement plan suited to an individual’s specific needs can provide peace of mind that a person can live comfortably in their later years of life. There are different ways to save for retirement, and at Ngidi SS & Co. our attorneys want the public to be informed about the benefits and other considerations that come with investing in a retirement fund. For those individuals that are already members of a retirement funds, it is important for those individuals to know and be informed about the Pension Funds Adjudicator and their function in the pension fund space. The office of the Pension Funds Adjudicator (PFA) is a statutory body established in terms of section 30B of the Pension Funds Act 24 of 1956. Section 30B entrusts the responsibility of carrying out the mandate on the Pension Funds Adjudicator and the Deputy Adjudicator. The Adjudicator and/or the deputy Adjudicators are appointed by the minister of Finance in consultation with the Financial Sector Conduct Authority (FSCA). More information about the Pension Funds Adjudicator will be made available in a different post. We’ll begin by exploring pension funds, as this is an option that many South Africans are familiar with, but do not have a defined understanding of how one can join a pension fund and the purpose behind the existence of pension funds in South Africa.
Pension Funds
A pension fund is joined through being employed by a company that is a member of a pension fund, and thus the company automatically offers its employees’ pension fund membership and pension benefits. Once an individual is a member of a pension fund through their employer, both the employer and the employee are required to pay contributions to the pension fund on a monthly basis, which contributions are tax deductible to specified limits. The monthly contributions paid to the pension fund are managed by persons who have been appointed as trustees of that particular pension fund. How the trustees of the pension fund are appointed can be found in the rules of that specific pension fund, commonly known as ‘The Rules of The Fund’, which rules are implemented and are also required to be updated on a regular basis in accordance with the Pension Funds Act 24 of 1956. The board of trustees of the fund are appointed for the sole purpose of managing the pension funds and, on occasion, to decide which assets to include, which at all times is in accordance with the rules that have been set out for that fund. Being a member of a pension fund essentially means that an individual is putting away money as a means of saving those funds for their financial future, which funds may be accessed once that individual has retired.
Once a member of a pension fund retires, this means that the retired individual may take a maximum of up to one third of their savings in a cash lump sum that is taxable by the South African Revenue Services (SARS). In the event that an individual leaves the company before their retirement, that individual is allowed to move their retirement savings out of their current fund and into the fund of their new employer, provided that the new employer is also a member of a pension fund. An individual also has the option of moving their retirement savings into a preservation fund or a retirement annuity after they have left a company. There are scenarios which exist where an individual is legally permitted to take out the full amount of their retirement interest as a cash lump sum. This event is only allowed to occur when the full amount being claimed is below the threshold amount. Whenever a person retires, the balance of their savings must be used to purchase an income annuity. In the event that a person leaves a company before they retire, that individual can also take up to a third of the pension fund as a cash pay-out. It is important for every person with a pension fund to know that the growth and income within their fund, while they’re a member of a pension fund, is tax free. Tax becomes payable to SARS upon accessing the funds.
Provident Funds
Prior to 1 March 2021, provident funds differed from pension funds in that, whenever a person resigned or retired, they could take out their entire savings as a cash lump sum. A requirement to purchase an annuity did not apply to provident funds. However, today provident funds are more similar to pension funds, as certain requirements have been implemented which took effect on 1 March 2021. A provident fund, just like a pension fund, is offered by the employer. Fund members are now required to take a third of the benefit as a lump sum, and with the remaining two thirds, a person is now required to purchase a pension that provides a monthly income. Whenever an individual leaves a company before they retire, be it through resignation or retrenchment, they will have to move their retirement savings out of the company fund. With a provident fund, an individual can access their retirement savings before retirement, but only if they leave their employer through resignation, retrenchment or a formal dismissal occurs. An individual can also transfer their savings tax-free to their new company’s pension fund, a preservation fund or to a retirement annuity. It is important for an individual that elects to take the cash pay-out to be aware of the tax implications that arise as a result.
Preservation Funds
This is a retirement fund which is specifically designed to receive lump sum benefits from a pension or provident fund whenever a person has resigned from their employment before retirement. While the funds are in the preservation fund, the capital continues to grow. A partial or full withdrawal from the fund is permitted before an individual reaches 55 years of age. The balance of the funds can only be accessed after the age of 55.
Retirement Annuities
A retirement annuity is similar to a pension fund, the only difference being that the retirement annuity is completely independent from an employer. A retirement annuity, on the other hand, is like a personal pension plan, and is available to individual investors. Similar to a pension fund, an individual can make monthly contributions towards their retirement savings. A person can also choose the funds which they would like to invest in, which investments operate within the limits that are set out by the retirement fund regulations in order to ensure that risk is managed appropriately. These funds are commonly known as Regulation 28 funds. Whenever an individual retires, they are allowed to take a maximum of one third as a cash lump sum from their retirement annuity. With the balance, an individual is required to purchase an income annuity. If the total amount in the fund is less than R24500.00, an individual is therefore not limited to taking one third of their savings as a lump sum. They are legally permitted to take the full amount as a cash lump sum. With an RA, you are generally not allowed to access your savings before age 55, with the following exceptions: The total balance of your RA is less than R15 000, you must retire early due to ill health or permanent disability, you have been a non-resident for tax purposes for an uninterrupted period of three years, according to the relevant South African Revenue Service (SARS) process and criteria. Leaving an employer for a new company does not impact on the individual’s retirement annuity, as this particular retirement plan is independent of any employer.
All retirement funds provide a tax-efficient way of saving for retirement. An individual’s monthly contributions towards their retirement fund is tax-deductible, with the tax deduction being limited to 27.5% of the individual’s taxable income or gross remuneration. This tax implication is determined by whichever amount is higher during a tax year, and it is also subject to a cap of R350 000. This means an individual will pay less income tax if they are making monthly contributions towards a retirement fund. Another important piece of information that all South Africans need to know is that, the returns on an individual’s retirement fund savings are not subject to any interest and dividend income or capital gains taxes.
Many South Africans often wonder what will happen to their retirement savings in the event of their untimely death. During the process of completing the necessary documentation related to securing a retirement plan, the individual would have nominated beneficiaries on a form which makes provision for such scenarios arising. However, it is important for the individual to know that, while the board of trustees of the fund will take their wishes into account, there is no guarantee that their nominated beneficiaries will receive the benefit that is allocated to them. This is because the trustees of the fund have a legal responsibility in terms of section 37C of the Pension Funds Act to ensure that the dependants of the deceased, being those persons who relied on the individual for financial support, receive a portion of the pay-out which will be made by the retirement fund.