Retirement Planning/Investing

[mikeytdurbs]

Hi all!

I am an expert in this field and would like to answer any queries.

[Dave A]

Hi Mike,

What are the material differences between a pension fund and a provident fund?

[flaker]

Just when i was looking for an expert, we find one who was "expert" in ?. Just got me wondering. Dave, were you a private investigator in your previous life?

[Dave A]

Dave, were you a private investigator in your previous life?

I don't recall a previous life, let alone ever being a private investigator

[Nickolai Naydenov]

Hi Mike,

What are the material differences between a pension fund and a provident fund?

Lol..l Dave I'd answer your question but I'll wait for the expert answer first and then I will agree or critise it
I manage a few of those, I believe I know a thing or two

[Dave A]

mikeytdurbs has already had some 60 days to think about it, Nickolai.

Maybe it's too big a question (like "how to make money" ) and needs to be narrowed down a bit. But at least a few headline differences would be useful, and then we could drill down on specifics from there.

[Nickolai Naydenov]

Lol... I only noticed now whet it was posted, so Mikey lost out on a provident fund opportunity

Ok, there are differences, I'm gona try keep it short even though quite a few things have to be mentioned.

Both are governed by the Pension Funds Act. Both of them there has to be agreement between employer and employee, once the fund is introduced to a company all new people must join the fund but existing staff have a choice to join the fund or they are given a period to join, so in other words it is compolsory. Pension fund is tax deductible up to the maximum of 7.5% of the employee salary, where provident fund is not tax deductible, however in both you can have a maximum of 20% contribution. Provident fund one can withdraw their funds when they leave the company they work for while pension fund they have to keep to at least age of 55. Provident fund you can withdraw the whole amount and pension fund maximum of 1/3 on retirement and the rest 2/3 paid as annuity where the first 315 000 is tax free and the rest is taxed as per the lump sum taxation table on retirement, the annuity you receive can be annually, bi-annually, quaterly or monthly and it will be taxed as per the tax tables as if you are receiving a salary amd people over age 65 get an extra rebate of R6015 pa, people over 75 get anther R2000 on top of that as well.

Of course having any fund is a benefit to your members, it makes sure that their families are taken care of in case of death, disability, terminal illness as well as retirement as often family members go to the employer asking for money. It also helps with retention of staff. It makes sure people will have money when they retire. These corporate benefits are structured to suit every need of a company and it's employees, there can be created different tiers of people, benefits, funds and so on. There is always a medical free limit which means that you can get people on the fund that generally will habe a loading or won't be accepted by a life assurance company. The money that the employer contributes are also tax deductible as it is seen as cost incured in production of income. A fund can be implemented at any stage, presentation can be done in front of all the employees andthen they can be advised individually. Goverment is working on making retirement funds compolsory so in the next 2-3 years you as a company will have to have corporate benefits and why wait until then when you can do it at an earlier stage and avoid last minute rush? So it only makes sense to introduce a fund.

From next year the maximum tax deductible contribution will be increased from 15% to 22.5% accross all retirement funding, reason for it is that not many people save for retirement.

I hope all this helps, if you have any questions let me know and if you want to do a fund I'll be more than happy to be the person who you use for that purpose

[Dave A]

So withdrawals from a provident fund are not taxable?

[Nickolai Naydenov]

A portion of it will be taxable, reason for that is employer contributions. So employer contributes certain amount towards the employee, the company claims the money as cost to production of income and thisnportion is not taxed. The employee portion is not tax deductable so he/she will pay tax on the contributions but won't pay tax on that portion on withdrawal. For example a person is working at a company and has R200 000 in the probident fund, let's say the contributions were 50-50 employer-employee which would mean that R100 000 have been taxed already and won't be taxed now(thereis no double taxation in SA or so they say lol...), the other R 100 000 will be taxed as per the lump sum withdrawal table which on this amount will be 100 000 - 22 500 = 77 500 @ 18% so in that case the total tax will be R13 950. Remember that the money can also be moved to a preservation fund where ithe whole amount won't be taxed. If the person decides to withdraw the money from the preserver they can do that, but the same can't be saod for pension fund as it depends on the rules of the fund.

[flaker]

employers are,however, more in favour of pension funds, where they themselves are also members. why is this? in short i was given to understand some 30 years ago that as the employee was not permanent permanent if you understand what i mean as compared to the owner employer & he would only get a portion of the the employer's contribution dependant on his years of service upon resignation. the balance that remained was redistributed to the remaining members.therefore the longest serving member gained the most. no prize in guessing who that was.
The above is my understanding & i stand to be corrected.

[Nickolai Naydenov]

I completely disagree with what they have told you Flaker. I don't know what exactly the legislation was 30 years ago, but what I know is that they were defind benefit funds meaning that when you retire you know how much you going to get while you alive, so if you died early all the contributions that have been paid by the retiree are lost, this is also called a life annuity. In simple terms say there are 10 people contributing R1000 every month, now they all retire and there is a pool of money(everything they contributed plus growth) let's say one of these people dies a year later his family will lose out because he only used a small portion of all he ever contributed,mlet's say that another member lives to 100 years old that would mean that he will get much more than what he ever contributed and his pension is literally funded by the member that died early. I hope that makes sense to you and I'm starting to think that this is what they told you then.

Since then thigs have change and now there are defined contributions pensio/provident fund, which means that you are not guaranteed a certain amount when you retire but all your contributions are used to purchase a living annuity(in case of a pesnison fund) that means that what you have contributed plus growth you will receive on say monthly basis where you have a choice to draw between 2.5 and 17.5 pa, of course it's your money so you decide the percentage and you will see how long it will last you for. Again the two sides to it is that if you die early your family will inherit the remaining amount of the annuity, but if you live long and the annuity is exausted then you don't have money to live.

In terms of preference I see pension fund being completely wiped out and I see only provident funds remaining. But bottom line is the company's contributions are claimed against tax and that's what matters to them.
The reason why companies and employees prefer provident funds is because the company deducts their contributions for tax and the employees have acumulated amount that they can take when they live the company, they don't have to wait till age 55. Please don't get me wrong, I see people not having enough money to retire every day and they panic, the money should be kept for reiterement but the provident fund gives you the flexibility and at the same time the money that you've paid tax on you won't pay tax again.

As a warning I would advice every single one of you to do a comprehensive needs analysis specifically for retirement so that you know where you stand in terms of how much would you need when you retire, how much you currently have, what is your current affordability, are currentlyna memeber of a fund or do you have a retirement annuity and so on, based on that, inflation, your age, goals, returns statistics and etc you will get an amount that you need to contribute every month increasing at certain percentage. If anybody needs help with it I will do it but I'll just say that it will be a mission to do that for say 200 people at once so if you are serious about retirement I would like to see you, discuss everything and then I will have all the figures ready for you and of course I'd expect to do some business with you. I'm not trying to be rude, but I earn commission only and no salary at all and I have secretary, petrol, internet, cellphone bills and etc to pay as we all do so with all due respect I don't want to waste my time doing the whole process for nothing. However if you are interested to see I can upload a summery of a retirement analysis so that one can see what it is like.

[Dave A]

Flaker, you go to the heart of what was going to be my next question - the issue of motive.

employers are,however, more in favour of pension funds...

Change that to "employers were, however, ..." and I reckon you're right on the money.

Years ago I was sold on setting up a pension fund for the company, with two benefits of doing so being punted:

1. It promoted staff loyalty. If anyone left the scheme, they'd be entitled to the benefits based on their personal contributions only, and not the company portion. You had to hang around to get the defined benefit. And obviously the longer you worked for the company, the more you stood to lose making an early exit.

2. Wind up the scheme and that company reserve (built on the basis of all the contributing employees over the years) should be quite a pot of gold and would be distributed among the remaining members (with some relatively trivial backdating on resignations). In the small company scenario, the owner would be one of the last ones out.

Quite practical motives for a company to have a pension fund

But moving on to the modern era where pension funds are structured as "defined contribution" funds.

Here the company contribution is immediately allocated to the employee's portfolio, and on withdrawal the employee is entitled to the benefits of both the employer and employee contributions - bang goes the staff loyalty incentive....

And of course, no more pot of gold.

So what is the modern day incentive to the company for having a pension (or provident) fund in place?

[Petrichor]

Thanks Dave for asking the question, and Nickolai for providing a clear and concise answer. This is very infomative and definitely knowledge I can use in future.

[Dave A]

they were defind benefit funds meaning that when you retire you know how much you going to get while you alive, so if you died early all the contributions that have been paid by the retiree are lost,
...
let's say one of these people dies a year later his family will lose out because he only used a small portion of all he ever contributed

It wasn't quite that bad.

If there was still capital value based on the employee's contribution left, that would be paid out to the estate.
There would also be a death benefit payout, typically the equivalent of two to three years' salary.

say that another member lives to 100 years old that would mean that he will get much more than what he ever contributed and his pension is literally funded by the member that died early.

Nope - it was funded by the company contribution reserve. In fact one of the reasons for the move to defined contribution schemes was the "what happens if the company contribution reserve gets wiped out" question.

In terms of preference I see pension fund being completely wiped out and I see only provident funds remaining.

I'm suspecting much the same, but... well that's why I'm asking all the questions

[Nickolai Naydenov]

Well now days to give an incentive to an employee you can offer him/her a deferred compensation, basically the company takes an investment policy out which would be paid and owned by the company and is tax deducible for the period agreed, once theperiod is reached the employee becomes the owner of the policy and can do whatever he/she wants to do with it.

Reasons to have a corporate benefits fund for a company are: people see it as a benefit and not just money, if something happens to an employee his family is taken care of and they won't ask the company for money, as an employer you structure the salaries in a way thet CTC doesn't really change, corporate benefits are becoming compulsory, employee has something to fall back on, employees are looked after, helps retain staff, no medicals done up to a certain level, people that might not otherwise get cover can now get it in a fund, costs are lower than on individual products and etc.

Dave from what I've studied and from what I know is that there was people passing away early before or just after retirement and their families had nothing from it, so there were complaints. I've specifically studied the fact that there was a pool of money and all the members would draw from there. I haven't heard of the funds you are talking about, maybe there was something like that before the ones Inwas talking about but that would make you really old lol...