Please watch the video on our YouTube channel BluFinance TV. Ayanda is taking us through different types of Retirement Funds. Pre-retirement planning is one of the most important Financial Planning aspects. Taking it seriously, it will help you to retire comfortably when you rich your retirement age.
Retirement funding is one of the most important financial planning aspects. You know that with financial planning you can do risk planning, you can do estate planning, you can do tax planning, you can do investments, you can do your retirement funding, but today we’ll focus mainly on retirement funding. When it comes to retirement funding, we have different plans that you can have.
The first one is defined contribution and the second one is defined benefits. When it comes to defined contributions, if you are taking, for example, a retirement annuity, in that retirement annuity you are making contributions on a monthly basis and when you retire or maybe when you want to access your money from that fund, you can only get what you have contributed plus returns on it. But when it comes to defined benefit, it is different, for example, with the government employees pension fund.
With government employees pension fund, people are contributing to the pension fund but when they retire, they resign, they emigrate, or maybe when someone passes away, government will use a formula to calculate how much that person is going to get from that pension fund, which could be more than what you have contributed plus returns or maybe less than what you have contributed plus returns. I think with defined benefit, sometimes you may make a loss, sometimes you may make a profit. It depends on how the market has been doing.
When it comes to retirement funding, we can talk about four funds, which is pension fund, provident fund, preservation fund, and also retirement annuities. Let us talk about pension fund and provident fund. When it comes to pension fund and provident fund, there must be employer employee relationship.
You cannot be a member of a provident fund or a pension fund if you are not employed by the company. It is only their employees who can be members of pension fund and a provident fund. The contribution that we are making to a provident fund or pension fund, it is deducted from your payslip.
Also, that contribution is taken into account when your tax is being calculated. The other thing which is important is that when you are resigning, emigrating, you can either have 100% access to your fund depending on you, and some people may decide that they are going to take 100% and get taxed according to withdrawal tax table, or maybe they can transfer their money to a preservation fund. When you are transferring your money to a preservation fund, you must know that there are no new contributions you can make to a preservation fund.
It is only the lump sum which was transferred from your provident fund or pension fund, and also that the access that you have, it is limited. You can only access 33% of the fund that you have, and the rest, which is 67%, can only be used to buy annuities when you reach retirement age. With immigration, I will explain it in one of the next episodes that I’m still going to do, because when it comes to emigrations, there are also rules that apply, but for now, I’m not going to talk about emigrations.
I will only talk about what is happening if you are within the Republic of South Africa. Moving on to a preservation fund. Preservation fund, I can say that it is more like a parking bay.
It is where when you have money in your pension fund, and you decide not to withdraw your money out of that pension fund, and then you take everything and put it in a preservation fund until you reach the retirement age. In that fund, your money will continue to grow. In that fund, you can only have one-third access, which is taxable with the Royal Tax Table.
Two-thirds will be used to buy annuities when you retire. When it comes to retirement annuities, there’s no need for employer-employer relationship. Anyone has access to it.
It could be someone employed. It could be someone unemployed. It could be someone who’s self-employed.
For those who are employed, in most cases, they are using retirement annuities to supplement their pension fund, preservation fund, or profit and fund. They know that during the tax season, at least they have more deductions that can be taken into account by sales, and they get maybe a tax refund. For those who are self-employed, for them, they know that they have no access to pension funds.
The only option they have, it is only retirement annuities to contribute towards their retirement. Some, they can contribute lump sum. They can contribute recurring, which is premiums on monthly basis, quarterly basis, or annual basis, depending on their affordability.
They know that at the end of the year of assessment, during the tax season, they’re going to get some tax deductibility. That means the tax they have paid may be reduced, and then they get a refund. When it comes to retirement annuities, when it is time to retire, you can withdraw your one-third, and it is taxable using the retirement table.
Also, your two-thirds is used to buy compulsory annuities. Everyone in South Africa, you have pension fund, profit and fund, retirement annuities. You have to buy compulsory annuities when you reach the retirement age.
Let’s say now you are resigning. When you are resigning, you can make your retirement annuity paid up by not contributing any further, because maybe you are not affording those premiums that are paid on a monthly basis, quarterly basis, or annually. You can make it paid up.
It will still be active. I do not want to be making contributions anymore. When you want to make contributions, some have rules.
They say that if you want to continue making contributions in the future, you have to first consider how many contributions you have missed. That means you have to pay, and then you start to contribute going forward. In case of immigration, also that is considered as withdrawal.
