Jason wants to know whether to opt for his company’s pension fund which includes group life or to invest in a retirement annuity.
Maya replies: Not all employees have a choice; employers are required, as a condition of registering their pension fund with the Registrar of Pension Funds, and Sars, to enroll every employee who joins their employ once the fund has been established. You may still want to use your full tax benefits by continuing with your RA as well, but then reduce your investment and only contribute that amount which will provide you with a tax benefit.
If however the company is only introducing the pension fund now, you do have a choice, but even so, the benefits of a company pension fund usually out-weight those of a retail retirement annuity. Dave Crawford, a financial retirement educator, says costs and flexibility are an important consideration:
Costs
- Because pension funds are much bigger, their management charges are usually considerably lower than those paid by individuals (retail investors) invested in RA’s. For example, one high equity portfolio charges a retail customer 3,15% p.a plus a performance fee of 80bps. However, the same manager charges a pension fund only 1%, plus a performance fee of 50bps.
- With a company pension fund the employers contribute on behalf of each member, which often matches or exceeds that of the member. This contribution usually covers all the expenses of the pension fund except for the fund management costs, and the balance is invested on the member’s behalf.
- Size also allows pension funds to provide cheaper death and disability cover, meaning more cover for less cost — it is also paid with before tax money. If you took out individual life cover you would pay the premiums with after tax money.
- However a pension fund for a small company may have higher costs so you need to understand the cost structure first and compare to your RA.
Flexibility
- You may not withdraw from a retirement annuity before reaching the age of 55, except if the value of the portfolio is less than R7 000 or if you are emigrating formally and wish to take the money with you.
- If you resign from a pension fund at any age prior to retirement you may withdraw the entire amount, although it is taxed.
- Death benefits for both vehicles are taxed but with an RA, your dependants will only receive one-third in cash with the rest used to purchase a monthly pension. A pension fund’s death benefit is usually paid out as a lump sum.