Whether you’re part of the public, private or just plain confused sector, financial writer Jacqui Pile and her team of experts offer you the best advice.
OUR EXPERT PANEL
ACQUI PILE is a freelance journalist who writes for a variety of financial publications. She has three children aged three, two and two months.
SHELDON HALCROW and ANDREW VAN OS are investment specialists at BoE Private Clients.
WARREN INGRAM is the executive director of Galileo Capital and the FPI Financial Planner of the Year.
SUNÉL VELDTMAN is a financial planner and author of Manage Your Money, Live Your Dream (Tafelberg), R149, kalahari.com
Q: I’ve been working part-time bringing up my children, and pensions haven’t been a priority, but now I’m 40, I think I should start saving. Is a pension essential? Or should I opt for a unit trust?
Sheldon: Saving through a pension vehicle such as a retirement annuity (RA) instead of contributing towards a unit trust or savings account forces you into making regular savings. You also won’t be able to access the capital you’ve invested until you retire and there are a number of brilliant tax incentives for contributions and investments within the RA.
Warren: If you work for a company that provides a pension, it makes sense to take advantage of the associated tax benefits. There are very few other investments that can compete with the tax advantages offered by a retirement fund.
Q: I’m approaching retirement and contribute to my company’s retirement fund. I don’t intend on stopping work. How will this affect my pension and provident fund?
Andrew: If your fund doesn’t allow for delayed retirement, you’ll have to leave the fund when you reach retirement age, but you could negotiate with your employer that you resign from the fund as a normal employee and rather contract your services to the company. When resigning from a fund, you can keep your money in a preservation fund. Although you can’t contribute to a preservation fund, your money is still invested and you won’t have to start receiving an annuity.
Q: My employer has a group pension scheme. Is it compulsory for me to join or should I start one of my own?
Sheldon: You’ll be required to join if the fund was already established before you joined the company. Employees who joined before the fund was set up will be able to choose whether or not they’d like to join.
Warren: Joining a group scheme offers other benefits such as access to life and disability cover at cheaper rates than you would get independently. In most situations, it makes sense to contribute to your group scheme.
Q: I’m 54, don’t have a pension, and don’t work, but my husband has an excellent scheme. He’s still entitled to a final salary pension. Can’t we just rely on that?
Sheldon: This requires a great amount of trust – what would happen if your husband died or if you get divorced? So sit down with your husband for a simple estate planning exercise to determine what would happen in both cases. You should have some assets in your name for immediate access in the event of his death, plus splitting assets may also have tax benefits.
Sunél: Although the Pension Funds Act provides for your protection, you don’t want to have to fight an expensive legal battle if your husband dies or you get divorced. Think rationally about what will happen to you in the worst case scenario and plan accordingly.
Q: Is there likely to be an increase in the pension age in South Africa? How will this affect my pension?
Sheldon: There is no official retirement age in SA and each pension fund has its own rules about when you can retire, but longer life expectancies require longer contributions to retirement funds by employees while they’re working. A global skills shortage also means professionals need to stay on the payroll beyond the standard retirement age of between 60 and 65. South Africa lags behind European countries in extending the retirement age, but it’s likely to increase in the next five years.
Warren: The earliest you can retire from an RA is 55, but you can let it run for as long as you like if the rules of a specific pension fund apply.
Sunél: It’s likely employees will put pressure on companies and pension schemes to increase their retirement age. We all have to be prepared to work, save and live longer.
Q: I’ve heard that there are a lot of regulatory changes taking place in the pension funds industry. How will they affect me?
Andrew: Because South Africans are terrible savers, the government is taking steps to introduce safety measures to stop employees from accessing their retirement funds each time they change jobs. The idea behind this is to prevent people from using their retirement funds to pay for current lifestyle expenses and then becoming dependent on the state later on. There are also moves to make employees contribute towards a National Social Security System and to make saving for retirement compulsory.
Q: I have the option to contribute to my company retirement fund (pension or provident fund) at different rates; should I pay the maximum?
Sheldon: Pension and provident funds are tax-incentivised savings vehicles. Your contributions to a pension fund are tax deductible and there’s no income tax or capital gains tax within the fund because you’re effectively deferring the tax payment, so it makes sense to contribute the maximum.
Warren: Ideally you should save around 20% of your total salary over your lifetime and should use the maximum tax deductions that you can get. For RAs, this is 15% of your taxable salary. Look at investing the other 5% in unit trusts or Exchange Traded Funds, which are indexed to the stock market.
Sunél: Contribute the maximum that your company’s retirement fund allows. Don’t look at your take-home pay alone when judging your remuneration; assess what you’re saving for retirement. It’s a question of foregoing now to benefit later.
Q: I belong to a group pension fund at work but have not been with the company for very long. Will that pension alone be enough to fund my retirement?
Sheldon: Don’t assume that the pension paid to you by your employer will be enough to live on, especially if you’ve only been contributing for a few years. Chat to a qualified planner and be realistic and honest about your expected income needs in retirement so you can calculate your contribution shortfall. This will give you a good idea of what the gap is between actual and expected income.
Warren: A good way to establish how much money you’ll need to retire is to multiply your last annual salary by about 20. That’s how much capital you’ll need in retirement.
Sunél: Sadly, most people don’t preserve their pension benefits when they switch jobs, so they effectively lose their pension savings each time they change jobs. If you haven’t preserved your previous savings, chances are you haven’t got enough stashed away. Don’t guess, ask a financial planner to calculate your retirement shortfall. w&h
March, 2012 / Woman&Home