Retirement Planning/Investing

[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...

[Dave A]

There are patches where some pretty sharp practices crept in. Maybe I'll make a post on that when I've got some time.

...but that would make you really old lol...

I've been around long enough to discover that the meaning of "really old" is very much a relative thing

[sykotik]

Hmm, stumbled across this topic thought i might ask a few questions, Im 25 have been with my employer for 5 years and contribute 9% to a provident fund, as far as i know that will never be sufficient at retirement. To be specific in my 5 years of employment i have only managed too accumulate about 15k... what other avenues should i be looking at in order for a trouble free retirement in the "distant" future??

[Nickolai Naydenov]

Well for this tax year we can look at what your RFI and NRFI is we can then calculate the maximum tax deductable amount, but I suggest you get a full financial needs analysis for retirement just so you know where you stand. From next year one will be able to deduct 22.5% of their total income for retirement tax deductable t the maximum of R250 000 everything over and above that will be yaxed but on retirement the money will be tax free.

Also don't forget that from next tax year the comany contributions will be subject to fringe benefit tax thereore all retirement funds and salaries should be restructured.

I hope that helps, feel free to pm me if you have any queries.

[Houses4Rent]

Since the thread links Retirement with Investing I am looking for some answers here.

Are there properties available to buy in retirement estates which can then be let to pensioners instead of being moved in by the buyer now, maybe never or at least at a much later stage when buyer hits that age.

I can see the not just local problem of people getting older then before and they all need to live somewhere with or without care facilities, but still it must suit certain needs. I believe there is a shortage of retirement housing already and it will get bigger. So I want to invest in buy to let in this sector.

The few things I looked at were all not suitable to this model. Any leads are welcome.

[Dave A]

The few things I looked at were all not suitable to this model.

That sounds like your requirements are more than just "retirement housing".
What are your other criteria that you need met, Marc?