QUESTIONS TO ASK YOUR EMPLOYER ABOUT YOUR RETIREMENT FUND BENEFITS
What is the nature of the fund: is it a pension fund, provident fund or retirement annuity (RA) fund? Gareth Collier, a director of Cape Town-based financial planning practice Crue Invest, says legislation governing withdrawals, tax and preservation depends on the type of fund you are using. For example, you can withdraw from a pension or provident fund if you leave your employer before retirement, but the rules of an RA fund prohibit withdrawals before the age of 55. What is my monthly contribution, and can I invest more every month if I choose to? Normally, your employer will contribute a percentage of your salary to a retirement fund, and you will also contribute a pre-determined percentage. Collier says you should find out what percentage you and your employer will be contributing, and if the total is not the maximum you can claim as a tax deduction, and the fund’s rules permit, you can contribute more each month to maximise your tax deduction. You can claim a deduction for contributions up to 27.5 percent of the higher of your remuneration or taxable income, with an annual limit of R350 000 on the contributions you can deduct. Do the fund’s rules make provision for a voluntary investment? This is important, because it will allow you to make additional lump-sum investments into your retirement fund to maximise your tax-deductible contributions in each tax year. Is there a retirement premiumwaiver benefit in place? If you have this benefit, it means that if you become disabled, the life assurer will continue contributing towards your retirement fund to ensure that your life, disability and any other risk cover continues, and that the employer’s contribution towards the retirement fund continues.
One of the big risks you face if you become disabled and cannot work is that you will not have sufficient cashflow to save for your retirement, and this is where a premium waiver can be a significant benefit, Collier says. Where are my funds invested, what is the asset allocation, and what fees are being charged? Retirement funds run by life assurance companies are generally more expensive, less flexible and not transparent in terms of fees, Collier says.
It is preferable if your retirement funds are being invested on a reputable unit trust platform, he says.
There is no one-size-fits-all investment strategy, so you should be able to select a strategy that is appropriate to your needs and your investment time horizon. If you are a few years from retirement, you probably want to take less investment risk than if you are a 25-year-old starting your career, Collier says.
It is essential that you understand your investment fees, he says. Find out what percentage of your invested assets are payable as fees. What are the advisers earning? What are the administration fees? Do the fund’s rules allow you to transfer your benefits to your previous retirement fund if you are joining a new fund after resigning from a previous job? This is an important benefit, because it allows you to transfer your savings to your new employer’s retirement fund without tax implications, Collier says.
If the new fund is cost-effective, your savings will continue to grow in a low-cost and tax-free fund.
If you cannot transfer your savings to your new employer’s fund, you can transfer your savings to an RA fund or preservation fund. Do I have the option of selecting the funds in which to invest? It is important that you have some choice when it comes to the underlying investments, because this allows you to tailor your investments to your age, investment horizon, appetite for risk and the level of savings required to provide the income you need in retirement, Collier says. Who are the advisers to the fund? It is important to know that your advisers are independent, qualified and reputable, Collier says. Are different categories of benefits available? Sometimes, employers provide different levels of benefits, depending the grading of your job, or they allow you to select the level of benefits. If you are on a higher job grade, you might be able to select a greater percentage of your contribution towards the retirement fund, or select a higher multiple in terms of life and disability cover. MORE QUESTIONS AND ANSWERS ON PAGE 16