The Ultimate Pension Cheat Sheet: A List of Hacks
Pension hacks? What hacks?
Most people need to blow into a paper-bag when they have to complete their new entrant form starting at an employer. It brings proper anxiety! I remember when I started in operational support (shout-out to V’s crew) at a big corporate - having to complete documents, provide ID copies, bank statements, tax numbers and on and on and on. I didn’t even know the difference between a pensionable salary, or Cost to Company. Never mind insurance benefits and building a retirement fund for old age.
Well luckily at BankerX we break it down, tell you why it is important and some awesome hacks you can use on your financial journey.
What is the use of a pension fund? What? You asked me this again? You must be new to the community - so pop in and read my article on Pensions 101, Understanding Pensions. It helps with the basics.
To re-cap, a pension or provident fund provides you with a long-term investment strategy for retirement. It further provides for insurance benefits, tax benefits and no creditor can ever touch your retirement fund monies. Lucky you ;)
Now that we got that out they way, and you understand the reason for a pension fund, let’s get to some hacks going which will help you when you strategize your wealth plan:
Why an emergency fund when it comes to pension hacks? Simple, cash flow remains king. You want to be in a position that when you resign from your employer, you don’t need to access your benefit! Simple! It gives you cash in hand, liquidity as they say. 3 to 6 months of cover is the rule of thumb. You can go for more, I wouldn’t recommend less.
In terms of Default Regulation 37, every fund has a default investment strategy. Most funds make use of a life-stage model when designing the default investment strategy. This means that you would be invested in a growth type portfolio in your younger years and the closer you get to retirement, they start moving you towards more balanced and conservative portfolios.
Understand these investment strategies, and the impact they have on you as a member and how you invest. You don’t want to cash out of the market at the wrong time and make a loss. That would be eina!
Use your investment strategy wisely and plan it with your registered financial advisor - so you can set your goals and work to achieve these. See if choice is offered. If you don’t know, pick the default!
Make sure you understand the insurance benefits provided to your Fund. Most of these benefits are expressed as a multiple of salary. Your income disability is a percentage of salary, either flat rate or based on a sliding scale.
Review your needs. If your fund offers choice in benefits, find out what they offer and understand what you need. A person at age 28, 45 and 60 would have very different risk profiles and insurance needs. Adapt your blueprint based on your insurance needs, and divert any monies remaining towards retirement or other forms of savings. Think TFSA - and please, not to buy a car in the future or pay for your wedding!! Ludicrous! Stop those product providers!
Your insurance benefits on the fund would further have a free cover limit. What is that you ask? Best explained through an example:
Let’s say your Fund provides a 4X death benefit, with a free cover limit of R1.5 million.
- You earn R10 000 per month - your death benefit at work is 4X your annual salary. Therefore R10 000 x 12 x 4 = R480 000.
Therefore the insurance value falls under the R1.5 million free cover limit and no medicals are required.
However, all of a sudden you are a big cheese and high roller, like we want all our members to be. Same story, death benefit of 4X with a free cover limit of R1.5 million, however you now earn a whopping R50 000 per month;
- You earn R50 000 per month - your death benefit at work is calculated as - R50 000 x 12 x 4 = R2.4 million.
Your beneficiaries will always receive the up to the free cover limit, however for the additional R900 000 above the free cover limit you would need to do medicals, if you want your beneficiaries to receive the life insurance.
Review your insurance benefits annually, doesn’t mean you need to make changes, just make sure they are still relevant. If the risk is no longer a problem or not required, rather use it to increase your contribution to your fund, or another investment - you see how I’m pushing you to save!
Pssstt, you cannot have more than a 100% income disability cover and you cannot use your life assurance benefit on your fund as surety on a property. You need specific cover for that!
After the above Insurance Blueprint discussion, it is only natural for me to remind the community to complete those Beneficiary Forms!! Now in fact! Thank you.
Unapproved death benefits on a pension fund could be paid to an ex-spouse or your deceased estate - I’m sure you don’t want that happening. Make sure you review your Beneficiary Form annually and ensure someone is nominated on the form.
You create generational wealth by ensuring that insurance cover is in place to provide comfort when you disabled or you are no longer here. Make sure you give your kids the gift of choice later in life.
Tax, tax, tax benefits - sing it with me!
Contributing towards a retirement fund provides you with a tax benefit. The tax benefit is 27.5% of Retirement Funding Income, and so you can only get a benefit on the portion used to invest for retirement.
The annual cap on this amount is R350 000 - trust me, you’ll be saving hard to reach this cap! Any retirement monies saved up to this cap is tax efficient, anything over this cap is tax inefficient.
It can be a combination of products, therefore, a pension and a retirement annuity. But you cannot claim 27.5% for a pension, then a provident and then a retirement annuity.
Leave your money alone
When you resign and you leave your current employer, don’t touch the cash, please people. Remember, I keep mentioning emergency funds? Get one, and if you need emergency monies, guess what!
Don’t touch your retirement monies you saved over the long term in your pension and provident fund to buy a PS5 - it won’t help you in retirement, trust me! Plus you’ll pay tax on anything you take in cash, taxman licking his lips. Trust me, the tax tables will make you puke.
Let’s recap on your options when you leave?
- Leave the money with your current fund - Deferred Member meaning you defer your benefit till later;
- Transfer to your new employer’s fund, if they have one;
- Transfer to a preservation fund;
- Transfer to a retirement annuity.
No tax is payable on any of the above transfers. What’s the difference between a preservation and retirement annuity fund? Here you go:
- You cannot access your monies until you are age 55 - early retirement age;
- You can make monthly contributions towards your retirement annuity.
- You have a one-time option to access your retirement fund money in cash. ONE TIME ONLY! And tax will be payable;
- You cannot make monthly contributions to a preservation fund.
If you take any cash, you pay tax as per the Withdrawal Tax Table below: (Retirement tax table is different - you pay the taxman way more when you take your money in cash on withdrawal)
How do you calculate the potential tax again on withdrawal?
Here’s an example:
You manage to build up R800 000 after 10 years with your employer and decide to cash out your retirement (bad idea). You want to know the tax before making your choice:
R800 000 - R25 000 = R775 000
Therefore you take R775 000 - R660 000 = R115 000
R115 000 x 27% = R31 050 tax on the R115 000
Therefore the total tax is R31 050 + R114 300 = R145 350.
You will therefore pay R145 350 (puke face) tax and you will get R654 650 (crying face) in your back pocket. Taxes are real people. Make sure you see a professional before accessing retirement funding. Also, if you have other tax issues with SARS, they will collect, they always collect.
The withdrawal and retirement tax table are cumulative. Make sure you don’t access your retirement monies - as it will wipe out your savings build over the long term.
What should you aim for in retirement?
The pension industry talks about 75% of your salary as at the date you retire. That is what you need. This means if you were earning R10 000 the day before your retirement, then the following month your pension should pay you at least R7 500 to maintain your living standards. Why 75% you ask? It’s based on some of the following assumptions:
- No more kids in the house - therefore no schooling or university;
- Your bond and cars should be paid off, no more debt to service;
- You can reduce your expenses due to less activity in the house - food, electricity and water.
The most pressing payments should be your medical aid - especially in retirement.
However, this is no longer true - we are the sandwich generation, having to provide for our children and look after our parents. Therefore, make sure you don’t only rely on your pension or provident fund. It is essential that you build wealth through different methods. But start with the basics!
What about retirement?
When you get to retirement - remember this. It’s a journey. Don’t access everything you are allowed to in cash - rather see a registered independent financial advisor. Thank me later.
They can help you with tax matters and structure your retirement. Your Fund further provides you with a Default Annuity Strategy in terms of Regulation 39 (each fund should have one) - which you can use to compare against your advisor! Use it! Save costs! You're welcome.
Check your fees!!!
Many, many, many, many times, and I can’t stress this enough, members don’t know about all the fees payable on a Fund. Here are some fee items you can ask your Fund Consultant about - say JP sent you (wink):
- Administration fee - the fee paid to the administrator on the Fund, usually a flat fee + an asset under management fee (expressed a percentage) payable for this service;
- Consulting fee - fee is paid to the broker/advisor/consultant providing intermediary and advice services to the Fund. This fee is regulated in terms of the ASISA;
- Governance Fee - Fee paid for governance on the Fund, and include FSCA levies, Trustee Fees, Auditor Fees, Valuation Exemptions etc.
- Insurance | risk fees - the fee payable towards your risk benefits on your Fund;
- Investment fee - these come in many forms, including asset based fees (percentage), transactional fees, performance fees etc. A fee generally not viewed by the Employer and felt by the member - make sure you aren’t being taken for a ride.
Understand the fees charged on your Fund. Know how it impacts your contribution towards your retirement, and what this impact would have on your growth. Further consider the services your Fund is getting for the fee they are paying!
You have the POWER!!!
You as a member of the Fund hold the power!!!! It is written as such in the Pension Funds Act. Your employer should have a benefit committee, representing the employer and the members.
As a member of a Fund, investing in it, you should have the power on why things change on the Fund. You should also hold the ultimate power to demand change if you feel change is necessary. It’s all in the palm of your hand, in terms of the Special Rules of a Fund!
Represent your community at work. Ask the questions, easy or difficult. Ask, make sure you are represented at committee levels or on the Board of Trustees. You have the power to effect change. Use it wisely!
The 10 hacks above make it easier for you to put a plan together, understand how it works in the fund environment and how you can be the change! I hope it inspires you, makes you want to know more, and gets you to think positively about your retirement and how you do need to prepare for it!
One day! I’m going to be prepared.