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Taking the "mystification" OUT of retirement.
CAVEATE EMPTOR (buyer beware)
Let's try to break this all down into phases of your life, and look
at the various terms which will apply to those phases.
PRIOR TO RETIREMENT
PENSION FUND:
A pension fund is registered by a company as a perk for employees to
try and assist them in building up sufficient retirement capital during
their working life.
Normally a company contributes 50% of the contribution or premium,
while the employee pays the balance. This structure could vary from
company to company, and also depend upon your position within the
company, so is not a hard and fast rule. The maximum contribution
pa = 10% of pensionable salary (excludes car allowances etc) by
employer and 7,5% by employee. These contributions are tax deductible
in yours and the companies hand’s.
This fund cannot be matured under normal circumstances until age 55
at the earliest, at which stage the employee can then elect to "retire"
from the fund (see "at retirement" further on). The only way that it can
be accessed would through death or disability, or if you left the company
and elected to cash it in and pay the tax on the capital.
PROVIDENT FUND:
Very similar to a pension fund in that it is set up by the company
for the same reasons. However, the contributions made by you are NOT
tax deductible, so in many cases, contributions will be paid 100% by
the employer as they get the tax deduction. The other major difference
is in the way it pays out at retirement ( see "at retirement" further on).
RETIREMENT ANNUITY:
This falls under the pensions act, and is regarded
as a "private" pension fund that anyone can take out to supplement his
or her pension or provident fund. Premiums are tax deductible based on
the greater of:
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15% of any salary that is deemed to be non-pensionable (e.g. your car allowance, or if you are self employed with no pension fund, then your full earnings);
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R 3500 less all fund contributions;
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R 1750 if you are on a pension fund.
You thus need to perform a small calculation to determine your
tax deductible amount that you can claim. As an example:
You are on a pension fund, paying R 18 750 pa, and your package is made up of:
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Salary pa
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R 250 000.00
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Car allowance
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R 60 000.00
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Retirement Annuity contributions pa
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R 12 000.00
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Tax deductions available pa will thus be the greater of :
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15% of non-pensionable (R 60 000 x 15%)
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R 9 000.00
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R 3500 – R 18 750 (R 18 750)
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R 0.00
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R 1750
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R 1750.00
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It is obvious that you will receive a higher tax deduction by
using your travel allowance and claiming the R 9000 pa.
Note:
- If you did not have a travel allowance, you would be stuck with only
R 1750 pa, and would thus not be able to claim your full contribution;
- Any excess premiums paid that cannot be
claimed must be noted, as they can be claimed back at retirement
date;
PRESERVATION FUND:
This slots in between all of the above, and only becomes relevant
should you elect to leave the company or become retrenched BEFORE
retirement age 55. It is simply an extension or continuation of your
pension or provident fund.
Note that at this juncture in your life (leaving the company etc),
you are entitled to either cash in your pension or provident fund,
which will be fully taxable (after the first R 1800 is deducted) in
your hands OR you can transfer the funds, free of tax, into a
preservation fund. This fund allows you access of up to 100% of your
funds ONCE between the time you invest into the preservation fund and
retirement age.
A very important note regarding this "accessibility" – many advisors/brokers
will recommend that you take the R 1800 tax free portion and transfer the
balance into a preservation fund. This will negate the accessibility, as the
receivers deems that R 1800 to be your one draw – be aware !
DEFERRED COMPENSATION:
A glorified endowment policy which is set up by a company on behalf
of an employee, primarily as a tool to retain their services (or a
reward for long service). Has a different tax structure to the above
( see "at retirement" further on). Company normally pays full premium.
AT RETIREMENT
Once you
have reached this magical age (and in today’s age of health care, it
is still a wonderful age, so enjoy it !), a whole myriad of options
open up for you, and the decisions become quite critical. We need to
look at these in depth.
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PENSION FUND and RETIREMENT ANNUITIES:
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A pension fund allows you to withdraw up to 1/3 of the fund value in
cash. This sum will have a portion that is tax free, and that portion
is calculated based on years of service. Generally this is around the
R 120 000 level for a pension fund, and a definite R 120 000 for a
retirement annuity, but be aware that IF your years of service on the
pension fund are less than 20, the tax free portion will be less than
R 120 000. Once you have extracted this "cash" portion, you can obviously
do with it as you please.
However, for the balance of 2/3, you HAVE TO purchase a COMPULSORY LIFE
ANNUITY of some sort – not to be confused with the RETIREMENT ANNUITY
into which you may be paying a monthly premium with Sanlam !
This is where the problems creep in – not many people are aware of the
variations within the term "Life Annuity" and the problem is that, once
committed, you cannot change your mind ! It is thus imperative that you
know what you are buying up front. Herewith a few definitions:
NIL GUARANTEE LIFE ANNUITY:
Bought from an insurance company. Secures a GUARANTEED income for
the life of the annuitant, and ceases on their death with NO further
benefits for spouse or heirs (lose the capital). Generally will pay
the highest income. Only really applicable to those who have no
dependents or need to support anyone else;
5/10/15 YEAR GUARANTEE AND LIFE THEREAFTER:
Bought from an insurance company. Will pay a guaranteed income for
the guaranteed period selected (5, 10 or 15 years) should the annuitant
die before that period expires. Will cease upon death of the annuitant
AFTER that period with no further benefits for heirs. Income is affected
by the length of the guarantee;
INSURED ANNUITY:
Bought from an insurance company. Same as a Nil Guarantee Life Annuity
above, however, part of the annuity income pays a life policy which will
insure the capital, thus allowing the heirs to receive the original capital
sum upon death of the annuitant;
"LIVING" ANNUITY:
A fairly new innovation that allows the capital to be invested and
managed by the annuitant (investment advisor), from which he/she can
select their own level of income between 5% and 20% of the capital sum
per annum. Probably the best option IF the capital is wisely invested
and IF the annuitant selects his/her income at a prudent level
(recommended at no higher than 8% - 10% pa);
I stress again that it is imperative that you obtain quotes and review
ALL the options. We at Brantam tend to lean towards the LIVING ANNUITY
as this does have the facility of preserving the capital for your heirs
and offers the annuitant flexibility in income choices, but it all needs
careful consideration before committing.
PROVIDENT FUND:
One of the so-called "plusses" of a provident fund is that the full
value can be commuted as cash at retirement, without being stuck with
the 1/3 – 2/3 rule. I struggle to actually see the benefit of this, as
ultimately at retirement you need to "buy" some income, so you will be
cashing it in, paying your taxes, and then be back to square one with
looking around for ways of generating a monthly income.
The recommendation is to rather look at transferring the fund value
into one of the above mentioned annuities free of tax the same way as
you would a pension fund.
PRESERVATION FUND:
As mentioned, a preservation fund is really a continuation of your
pension or provident fund, and will thus be treated the same as for
those products.
DEFERRED COMPENSATION:
As mentioned, this is a glorified endowment, however with one big difference:
Because the fund was instituted by a company, and the company (in 99% of
the cases) owns the contract, only the first R 30 000 will be free of tax,
with the balance being taxed at your average rates. Thus if you have been
paying in for 30 years and have accumulated R 500 000, a full R 470 000 will
be taxed at as much as 36 % !!
Once you have matured this and paid the tax, the funds become yours to
use as you see fit.
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This has been a rather long winded diatribe on retirement funding,
but a very important one. No-one expects you to remember all of this
(that is what we are here for), but it will hopefully provide you with
a clearer insight into the pitfalls which may present themselves. Print
it and keep.
* * * HAPPY RETIREMENT ! * * *
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