• Intro
• Products
• Retirement Annuities
• Preservation Funds

Introduction to Retirement Products

Less than 10% of South Africans retire financially secure and independent. Out of 100 people retiring at 65:

• 34 have to keep working
• 32 are cared for by the state
• 17 are dependent on their families
• 8 are supported by welfare
• 9 have made adequate provision for retirement

Our current pension fund legislation, (the Pensions Fund Act of 1956) was drafted at a time when the working environment was very different: fewer women worked outside the home and most employees worked for one or two employers for the bulk of their working lives.

Research shows that current and future generations are likely to have more than 7 career changes. Not only does this often affect pension contributions, but more significantly, at the transition between careers too many South Africans withdraw their pension fund benefits and spend the money.

Pension fund reforms under discussion in South Africa are proposing the extended use of portable pension schemes such as Retirement Annuity Funds which are not dependant on employers or occupational pension funds.

Why do you get tax benefits for saving for your own retirement?

The government wants to encourage people to save for their retirement so that we are less dependent on the state at the time of retirement. In addition, from the point of view of the national economy, we have to improve our savings habits in order to achieve economic progress. It is vital to change the "spend rather than save" culture that prevails.

In addition, South Africa is one of very few countries in the world where you are entitled to receive a pension without paying into a government pension fund during your working lifetime. The government aims to encourage as many of its citizens to save for their own retirement as possible in order to limit the demands on the current free R850 per person per month.

Simply, the government wants to incentivise as many people as possible to save for their own retirement in order to decrease its own future liability. The less the government has to pay out by way of pension funds, the more can be spent on other services.

Governments in other countries are facing similar issues. European countries with declining populations are experiencing the greatest difficulties looking ahead, as the number of working adults is expected to be insufficient to fund the retirement needs of their own retirement as well as fulfill the contracts. People born between 1965 and 1985 are particularly affected as their taxes will contribute to the retirement benefits of older generations, and yet they will be expected to partly fund their own benefits from personal savings.

As former president Nelson Mandela has said: "Democracy will have little content, and indeed, will be short lived if we cannot address our socio-economic problems with an expanding and growing economy."

What other benefits are there?

Another major benefit of retirement funds is that creditors may not attach your assets if they are housed in a retirement fund vehicle. However, the law does not protect those who 'hide' their assets in a retirement fund vehicle in order to avoid having them attached by creditor. The Receiver of Revenue and spouses or children entitled to maintenance in terms of a court order are entitled to access to assets in a retirement fund before the maturity date of the fund.

What are the disadvantages of retirement investments?

When you take advantage of the tax deductibility of your contributions you relinquish some important rights to your money:

• In the event of your death, you may not choose who should inherit the proceeds of your retirement funds. Even though you may have stipulated the beneficiaries of your assets, the trustees of the fund are legally obliged to ensure that the proceeds of your retirement funds go to your dependants, the people who relied on you as a breadwinner.
• Pension fund rules are designed to make it very difficult for you to access your funds before the age of 55. If you are disabled and need money to live on, there is a process whereby you can appeal to the trustees of your retirement fund to make the money available to you. The terms and conditions that allow trustees to pay you out are very strictly monitored. (In other countries, trustees of pension funds are permitted fund holders access to their investments in the event of 'life changing events' including retrenchment, the diagnosis of dread diseases and so on, but this does not apply in South Africa.)
• When you retire you do not have access to more than a third of your retirement fund assets. Present fund rules stipulate that in the case of pension preservation funds and retirement annuities, only 1/3 of the benefit may be cashed in at retirement date. The remaining 2/3 has to be used to buy an annuity. This means that the money has to be given to an approved financial institution who will invest the money on your behalf in such a way that the proceeds are able to give you a monthly pension.
• Pension fund assets fall into a separate category in your estate when you die. There are two important differences between retirement fund assets and non-retirement fund assets in your estate when you die.
  • You do not pay estate duty tax on retirement fund benefits
  • you forgo the right to leave your retirement fund assets to whomever you please. You have to leave the money to your dependants and those who are financially dependent on you.
• Legislation imposes certain restrictions on the investment of the assets of pension funds. Pension funds have to be invested in a way that is considered safe for long term investments. Pension funds are not allowed to invest big percentages of portfolios in what are considered risky or volatile investments. Prudential Investment Guidelines are included in the Pensions Fund Act of 1958, and are expected to remain an important part of pension fund legislation. Many unit trust funds are invested according to prudential investment guidelines.

• It is possible that in the future, the government may require that a certain portion of retirement funds are invested in projects which contribute to the social good.

If the government wishes to encourage a savings culture, why do they tax the income portion of retirement investments?

Most countries tax retirement savings at some point of the life of the investment. In South Africa the initial investment is partially exempt of tax and the benefit is partially tax free. In the March 2006 budget, the tax on the income portion of the investment, (which has to be at least 25% of the investment) was reduced from 18% to 9%. The tax on investment income was introduced as a temporary measure in 1995, and suggestions have been made that this form of taxation should be reduced or removed.

Members of Retirement Annuity Funds, Pension Funds, Provident Funds and Preservation funds should always bear in mind the basic rationale and 'contract' associated with investing in these vehicles.