Retirement terminology 101 - These terms should get you off to a good start
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By Gielie de Swardt
Unfortunately, we don't have to look very far in South Africa to locate frightening statistics about the state of retirement in our country. The Sanlam Benchmark Survey of 2020 showed that 61% of South African pensioners couldn't make ends meet. The 10X South African Retirement Reality Report 2020 found that nearly half (49%) of South Africans do not have a retirement plan. The Federation of Unions of South Africa (Fedusa) said that only one in three South African adults (including pensioners) have some form of pension.
What is so tragic about these statistics is that the deficit which many people find themselves with is a result of a lack of financial education, knowledge and counselling, rather than a lack of will. The truth is that retiring well is very manageable for those earning an income, and it just takes knowledge, discipline and commitment.
The very best outcome for retirement is if you save for retirement from very early in your working life, but it really is never too late to start. Don't let the complexities of retirement speak to become a barrier to building confidence and making the right moves towards a healthy retirement. 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. There is a tax saving, as contributions are subtracted from your gross annual income before tax is calculated. At retirement, the fund's benefits used to be fully available in cash once the tax has been paid. But effective 1 March 2021, provident funds are treated the same as pension funds. However, your contributions to a provident fund before 1 March 2021 will be ring-fenced, and the old rules still apply to the ring-fenced portion.
This is a retirement-saving vehicle largely used by self-employed individuals or those without a retirement fund option at work. There is a tax saving, as contributions are subtracted from your gross annual income before tax is calculated. You will need to inform your payroll administrator if you want to enjoy the tax relief through your salary. Otherwise, you will have to submit a tax certificate to SARS every year to prove your contributions and possibly get a tax refund once your tax return has been finalised.
At retirement, only a third of the capital can be taken as a lump sum, subject to tax.
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 your capital prior to retirement, subject to withdrawal tax. At retirement, a maximum of one-third of your fund value can be taken as a cash lump sum, subject to retirement tax, 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 your capital sum prior to retirement, subject to withdrawal tax. At retirement, a maximum of one-third of your capital can be taken as a cash lump sum, subject to retirement tax, while the remaining two thirds must be used 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 (you). Unlike a defined benefit retirement fund, the amount of money you receive on retirement is not guaranteed. You decide where the fund should invest your contributions – from a range of underlying investment funds that the fund trustees make available – and you take on the full investment risk. The provident fund, pension fund, and retirement annuity mentioned earlier are all examples of defined contribution funds.
Gielie de Swardt is the head of retail distribution at Sanlam Investments