Group RA or umbrella fund? What you should consider

any money from the RA or even use the RA as security to borrow money.

Tax. If you do not contribute to an occupational retirement fund, you can deduct your contributions to an RA fund from your taxable income, up to 15 percent.

If you belong to an umbrella fund, you can deduct contributions equal to 7.5 percent of your pensionable income, and your employer can contribute a further 20 percent without tax consequences for you.

A new tax regime is scheduled to be implemented soon, possibly on March 1 next year, that will permit members of all retirement funds to deduct their contributions from their taxable income or remuneration, whichever is higher, up to 27.5 percent.

Gluckman says the tax incentives that currently favour umbrella funds have limited the growth of group RAs. He expects that the move to group RAs could be more rapid once the new tax regime is implemented.

Investment decisions. With umbrella funds, employers and the trustees of the fund establish a few investment options, and most members select the default option.

With RA funds, in most cases, members must make their own investment decisions.

Group RAs are offered on investment platforms run by linkedinvestment services providers, so the choice of investments can be very wide and include the funds of many collective investment schemes.

Some providers of group RAs, in agreement with employers, limit the choice of investments, but members can insist on wider choice.

Research has shown that members who are given a wide choice of investments often make the wrong choices, which undermines their ability to retire financially secure.

Advice. Members of occupational retirement funds, including umbrella funds, do not have to be given financial advice individually.

In terms of the Financial Advisory and Intermediary Services Act, members of RA funds, including group RA funds, must be given advice by a financial adviser. Gluckman says he doubts that group RA funds can meet this requirement, because a large number of RAs are sold in a group arrangement.

Costs. Gluckman says it is difficult to draw any firm conclusions on the costs of umbrella funds compared with the “new-generation” RA products that are typically offered as group RAs.

Commercial umbrella funds and group RAs levy charges in different ways, making it difficult to compare them, particularly when fees for financial advice are taken into account.

Leon Campher, the chief executive of the Association for Savings & Investment SA (Asisa), confirmed this week that it could soon become easier to compare different types of investment products, because he expects an Asisa project aimed at introducing “effective annual costs” (EAC) to be completed within the next few months.

EAC will replace the reduction-inyield measure of costs used by the life assurance industry and the total expense ratios used by the collective investment scheme industry.

Magda Wierzycka, the chief executive of Sygnia Asset Management, says that costs depend on the investments in the group RA and the umbrella fund.

She says that her company’s group RA, which confines the choice of investments to low-cost index-tracking portfolios, is the cheapest form of retirement-saving in South Africa and will beat any umbrella fund on costs.

Suitability. It is unlikely that group RA funds are suitable for low-income employees, because there are minimum investment amounts and restrictions on withdrawals.

Members of provident funds can withdraw all or some of their savings in cash when they resign or are retrenched and can take all of their savings as a cash lump sum at retirement. This may change next year, when members will have to take twothirds of future contributions that exceed a certain amount as a pension.

Most low-income employees belong to provident funds, including umbrella provident funds, because the tax incentives on contributions to pension funds would not be meaningful for them, particularly if they earn less than the income tax threshold of R73 650 a year for people under the age of 65.

If low-income employees who earn more than the tax threshold joined a group RA fund, they would have to complete an income tax return, which they would otherwise not have to do if they earned less than R350 000 a year and received their income from one employer only.

Some financial institutions are offering the recently introduced tax-free savings accounts as “group” savings products for low-income employees, because of the ease with which investors can withdraw their money.

Employees can withdraw their money from a tax-free savings account at any stage, whereas money in a provident umbrella fund can be withdrawn only when you leave the fund, either before retirement (for example, if you resign) or at retirement. – Bruce Cameron