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- Retirement Savings
In the past, the de facto retirement saving product has been the Pension or Provident fund, especially as a retirement solution for large corporates. But as times continue to change, we see the benefits of the adaptive Group Retirement Annuity (GRA) begin to outweigh pension fund schemes.
Increased work force mobility makes it easier for employees to cash in their pension funds when changing jobs. This is counterproductive as they lose out on the savings longevity and is one of the main reasons why we see only 6% of South African’s able to retire financially independent.
For this reason we see companies both large and small embracing the GRA Scheme for their Employee Benefit structures.
1. Fees: most of your traditional Group Pension funds charge layered member, product and administration fees, while the GRA only charges an administration fee on the market level across all investments. Another advantage with having a GRA is that there are no initial admin fees, fees for switching between the underlying unit trusts, or any exit fees. The costs are all disclosed and very transparent.
If you compare the sales charges on a monthly basis versus your typical Group Pension scheme, the results are astounding. Where the GRA has total charges of 0.08% monthly, the outdated Group Pension loses up to 31.23% of the monthly contribution to total charges. That is an astonishing 390 times more expensive! With the GRA, a larger percentage of the contribution will always go towards the investment savings, and not fees.
2. Contributions: these are often predefined according to your group pension specifications. Any adjusting, stopping or starting of contributions may face additional penalties or fees but the GRA is more flexible on this front. GRA members may contribute as little as R250 per month.
3. Fund Selection: with Group Pension schemes the member is not the individual making the fund choices, and will often have to pay extra if they wish to do so. However, GRA members can choose and switch between underlying funds at their own discretion and at no extra cost, enhancing their individual choice and interaction.
4. Transparency: with your classic Group Pension scheme, reporting is often infrequent and not transparent. GRA members receive quarterly statements, annual benefit statements, and notifications of any fund changes or transactions. Furthermore they receive an online account login whereby they are able to actively monitor their retirement savings.
5. Portability: usually if an employee wishes to leave their employer they would need to withdraw their savings (not ideal for retirement purposes) or transfer it to another retirement fund. GRA members can keep and continue to contribute to their RA, as it is in the individual’s own capacity.
6. Retirement Age: Group Pension Scheme usually specifies this at the age of 65 years. GRA benefits may be taken anytime from the age of 55. It is however, important to note that your RA savings may not be withdrawn before this, disallowing the option of early retirement or taking a withdrawal benefit when switching jobs.
7. Tax Benefits: if you already have an existing pension fund, that which you earn is deemed to be “pensionable income” with a tax deduction of up 7.5% of these earnings. As a GRA member having the RA as your standalone retirement fund (i.e. no pension fund), you qualify for a tax deduction of up to 15% of your income. Therefore to get the maximum possible tax benefit, it would be prudent to transfer your pension savings into the RA, instead of having both.
8. Employers: do not only gain all the aforementioned benefits of the GRA product. Additionally, they institute clear individual accountability to their employees and their retirement. GRA’s also provide a platform for employers to fulfil their retirement savings obligation to their employees. Employers can receive up to a 20% tax deduction on the company’s contributions to the GRA. Furthermore, GRA’s help employers manage rising costs associated with existing pension/umbrella funds, and the administration is completely simplified.
Having the best possible Employee Benefit scheme available is a benchmark that every company should be striving towards. Clearly there aren’t many that come close to the new and improved GRA. The cost-effectiveness, accessibility, transparency and increased tax benefits for both parties is apparent – the choice has thus seemingly been made for the employer. So what are you waiting for?
Andre Bottger
Wealth Manager
Beta Wealth Financial Services
021- 065 0330