In most cases, a company retirement fund becomes the largest asset someone owns by the time they retire. That is, of course, if the proceeds were preserved every time they changed their employment or if they were employed with the same employer for multiple decades.

It’s alarming how often employees know very little about their retirement fund/s. All the benefits of retirement funds must be considered when one embarks on the path of financial planning. Ignoring your retirement fund means that you probably exclude from your planning the potentially largest asset you may accumulate over your lifetime.

Generally, retirement funds are compulsory funds that every new employee must join as a condition of employment. Employers should provide a booklet that explains all the retirement fund benefits and other corporate benefits like life cover, income protection, and funeral cover. What must employees be mindful of?

• If group benefits (life cover, income protection and funeral cover) are offered, are they approved or unapproved?

• How much is the “free-cover limit”? (The life cover and income protection limit that you qualify for before a medical examination is required.)

• What are the contribution rates of the employer and the employee?

• What is the cost of the risk cover?

• How much of the total monthly contribution gets allocated to the investment portion of the fund?

• Do members have individual choices of investment portfolios in which they can invest?

• If not, what does the default investment portfolio look like?

• How do you access benefit statements? Administrators of retirement funds often offer members a portal where they can register, draw statements, and interact with them.

• What is the retirement age stipulated in the fund rules, and if you work beyond retirement age, will you be able to remain a retirement fund member?

• Do you have a continuation option should you leave your employer?

• Is the fund a standalone fund (private fund) or an umbrella fund (administrator/life company-owned fund to which the employer becomes a participating employer)?

• Is the fund a defined benefit or defined contribution fund?

• Can you voluntarily increase your contribution towards the retirement component?

• Can you remain a member of the fund when you resign?

Why is it important to be mindful of the above?

Let me start from the top.

The Pension Funds Act regulates retirement funds, and the rules, benefits, and payouts are determined by a panel of trustees. Effectively, this means that anything belonging to the fund is regulated under the trustees’ auspices. This is particularly relevant if a member dies while still a fund member.

Approved or unapproved benefits? What does this mean?

Unapproved risk benefits are considered “standalone” and do not belong to the retirement fund. The employer enters into a separate agreement with an underwriter, and no retirement fund needs to be the “carrier” of these benefits. Benefits will be paid out to nominated beneficiaries, and the proceeds of death cover will not be taxed. Estate duty will be applicable if anyone except a spouse is nominated as a beneficiary. Make sure that you have beneficiaries nominated; otherwise, the proceeds will be paid to your estate and be subject to estate duty and executor fees.

Approved risk benefits belong to the retirement fund and will form part of the total fund credit (retirement fund investment account plus death benefit). This has two implications. Firstly, the trustees will decide who gets paid what in the event of death, irrespective of who the nominated beneficiaries are. Secondly, the proceeds will be taxed according to the retirement tax tables where a cash commutation is chosen. No estate duty will be applicable since the proceeds resort under the Pension Funds Act.

Considering the tax implications of the retirement tax tables, it does mean that the death cover can be reduced by 36% due to tax. This needs to be considered in your financial planning to prevent a severe shortfall. 

The different risk benefits offered. Certain risk benefits have restrictions. While the limit of death coverage is probably too high to mention, the same cannot be said about income protection. Legislation restricts income protection to 75% of taxable income and this cover is aggregated. If you have private income protection cover and you join a new employer that offers this cover, you will probably be overinsured and one of the covers may not pay out. This will result in wasted contributions.  

Contributions will ultimately determine (with fund returns) how much your retirement fund will be worth when you retire. One of the biggest challenges in your planning is determining the future contributions required to meet your financial goals. Given the quantum of your and your employer’s contributions over many years, contributions towards your retirement fund cannot be ignored, and unfortunately, too often, this is the case.

Investment choice. Many modern retirement funds offer member investment choices where they can choose how their funds must be invested. We find that members tend to be blazé about how their retirement funds get invested. Remember that a 1% per year difference in returns over 40 years leads to approximately 38% more capital accumulated over the period. Optimising investment returns is crucial and cannot be ignored if you have the option to choose. Make this part of your discussions with your review meetings with your financial planner.

The continuation option offers you the opportunity to continue with your risk benefits in your private capacity without underwriting should you leave the employer at some point in the future. This is particularly important if you may have insurability challenges in the future.

Defined benefit or defined contribution. Most new funds are defined contribution funds, where members are responsible for accumulating funds until retirement and then acquiring their own personal pension in the form of a living annuity or a life annuity. Defined benefit funds, on the other hand, place the responsibility on the employer to pay a guaranteed pension for the retiree’s lifespan, where the pension is based on the years of service and the final salary of the employee. This liability must be declared in the employer’s balance sheet, which affects the company’s value, hence the swing to defined contribution funds away from defined benefit funds. Members who selected the defined benefit fund when they were given the opportunity to choose in the past seem to be in better positions than those who opted for the defined contribution option.

Retirement funds often provide underlying funds offered by major investment houses at institutional pricing. This means that you can, in many cases, invest in the same funds as you can as an individual private investor but at a discounted rate. Institutional price classes are sometimes discounted by as much as 30% compared to retail class unit trusts.

If you have additional surplus funds monthly, it may be worthwhile considering increasing your contribution towards your corporate retirement fund should the fund rules and your employer allow it. The same applies to when you resign and the rules allow you to remain on the fund as a paid-up member. No further contributions will be allowed but you will benefit from the lower fees.

I hope the above helped. Don’t fall into the trap of not including your biggest asset in your planning. Include it, and you may just be pleasantly surprised …

Happy investing and successful planning!