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Question: I am retiring from the public service shortly. There seems to be uncertainty about whether I can ask for a lump sum or if I should take it as it is – gratuity and annuity. Can you help with this one?


Your retirement strategy requires careful consideration. For a comprehensive and reliable answer, we would have to conduct a full needs analysis, considering:

  • Your age,
  • The total amount of your savings,
  • Your income needs,
  • Your family affairs, and
  • Your estate-planning objectives.  

You should, however, appreciate the risks of your different options:

  • With a conventional annuity, you are basically buying insurance. This insurance will ensure that you have a steady income, possibly growing with inflation, for the rest of your life. You don't have to worry about how old you may get, or what investment markets will do over the next twenty years. That's the life company's problem. The downside is that:

    - The capital dies with you (or your spouse, if your annuity includes a spousal benefit), and

    - You have no flexibility. Your income is fixed and if you want to emigrate, you will still have to draw your pension here and then request a regular transfer.

  • If you take the lump sum, you need to know what you are doing: how to invest the money appropriately and how much to draw down every year. You run the risk of outliving your capital and of poor investment returns. Few people manage these risks well and most who take the lump sum tend to deplete it within ten years. This why, in future, National Treasury's retirement reforms will require all retirement investors to use two-thirds of their retirement savings to purchase an annuity.

  • If you select a living annuity rather than a guaranteed annuity, you also assume the longevity and investment risk, but your capital does not die with you.  This means your decision depends on your objectives.  

A possible compromise is to secure a minimum guaranteed income using a conventional annuity and to convert the rest to cash or a living annuity.

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Question: My retirement annuity will mature next year. I have since discovered that it will not yield the benefits I expected it to because the AIM was not included over the years. What should I do to increase my returns at this stage? If I reinvest my lump sum will this make any difference in my monthly benefits?


To answer your question in full, we would have to do a proper needs analysis. At this point, we have no idea:

  • How old you are,
  • The value of the benefit,
  • Whether you will continue to work, and
  • How you plan to claim your fund benefit.

These factors would all instruct our advice. The answers below are therefore mainly of a general nature, and do not constitute advice.   

Your long-term investment return is largely dependent on:

  • Your asset mix,
  • the fees you pay, and
  • If you choose to speculate on picking an actively-managed fund out of the hundreds on offer, the performance of that fund.

If you wish to increase your investment return, you should revisit all these aspects, although with less than a year to go, there is little to be done now to increase your pension, other than delaying retirement and increasing your contribution. But you should consider the factors below, if you still have time on your side:

  • Is your asset allocation appropriate for your age and time horizon? If you are still many years from retirement, your portfolio should emphasise higher-risk assets as these have historically delivered the highest returns over the long term.
  • However, if you are close to retirement, you need to be careful not to expose too much of your portfolio to the volatile return of the share market. As a pay-off, the lower-risk assets (bonds and cash) will likely deliver a lower return.
  • What fees are you paying? Your disappointing return may also be a function of the high fees charged by the traditional life insurance RA. Understand that the long-term, real (after-inflation) return on a balanced high-equity portfolio is no more than 5%. If you are paying fees of 3% (the SA retail average), you are giving away 60% of your real return. Over a 40-year savings term, that would halve the value (in today's money terms) of your final pay-out.
  • How well has your fund manager performed? Active fund managers, i.e. almost all fund managers in SA, rely on stock picking and market timing with the goal of delivering an above-average return.

This is an expensive process - think of the portfolio managers, analysts and trading costs that must be paid - and generally, it does not work. Probably less than 1 in 10 fund managers manage to beat the market over the long term, after fees. Some do well, but the majority of investors would have been better off simply earning the market return in an index fund, paying very low fees. 

Reconsider how your money should be invested, and don't be swayed by advisers who push you to more expensive products - many are conflicted as they earn commission on the products they sell.

  • Can you achieve a better retirement income by reinvesting the lump sum? This is a difficult question with many factors and tax permutations to consider. You do not specify how you plan to reinvest this money, or if you can even afford to do so. Different options have different tax consequences that may work for or against you.

In general, if you transfer the full amount to an annuity, the entire proceeds will be transferred, tax-free, and you will be taxed on the annuity income. Your average tax rate will depend on your annuity income:

  • Currently, you pay no tax on income below R67 000 (below 65) the first tax bracket then kicks in at 18%.  Alternatively, you can claim one-third of your benefit as a lump sum:

-     The first R315 000 is not taxed,
-    The second at 18%,  
-    The third at 27%, and
-     The balance above R945 000 is taxed at 36%.

As an example, if you choose a living annuity, the investment return it earns will not be taxed, only your withdrawal will be. If your withdrawal is below R67 000 it makes little sense to hold back, say R315 000, to invest in shares and pay 15% withholding tax on your dividend income. However, if you invest in cash, the first R22 800 of interest would also be tax exempt. So it all depends.

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Question: What would be the tax deduction for an RA to be paid out to a widow who is employed? And how would the money be paid: lump sum or monthly?


You can choose how you wish to receive the RA death benefit: either as a lump sum, an annuity, or as a combination of the two. Your employment status does not come into this:

  • Any lump sum you receive will be taxed as though it had been received by the RA member on the day preceding their passing. It will be taxed per the retirement lump sum tax table, which provides that:

-     The first R315 000 is paid out tax free,
-    The next R315 000 is taxed at 18%,
-    The third R315 000 at 27%, and
-    Any balance above R945 000 at 36%.

  • However, the aggregation principle applies:

-    If the deceased had previously received or claimed a retirement fund benefit as a lump sum, this will be considered in determining the tax due on the lump sum. In other words, the tax- free - or lower taxed - portions can only be claimed once, in aggregate, during a life time.

  • If you choose an annuity, you would pay tax on the annuity income as per the personal income tax table ruling at the time. Given that you are presently earning an income, this annuity will be taxed at a higher rate than if you were unemployed. If you do not need the income at this stage, you also have the option to preserve your RA death benefit until you do.    


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Question: Please may I have more information about the fact that contributions you make to your employees’ retirement annuity, pension or provident funds will be treated as a taxable fringe benefit in the hands of your employees.


In terms of present legislation:

  • Only employers may claim deductions to a provident fund,
  • Both employer and employees can deduct contributions to a pension fund, and
  • Only individuals can claim deductions to a retirement annuity fund.

That's all very confusing so the announced retirement reforms propose to standardise the treatment of contributions:

  • In future, only individuals/employees may deduct contributions to a retirement fund. This holds even if the employer makes the contribution - the employee gets to deduct the employer's contribution.
  • To prevent the employee getting a double tax benefit, for tax purposes the employer's contribution must now be included in the employee's remuneration.  This will effectively be achieved by levying fringe benefit tax on the employer's contribution, which will offset the benefit of the tax deduction the employee receives.

To illustrate by way of an example:

  • Say the employer pays a salary of R10 000 and also make a contribution on behalf of the employee to a provident fund of R2 000.
  • The employee is taxed on R10 000 and the employer gets the deduction for the R2 000 contribution.
  • Under the proposed reform, the employee now gets the deduction. If the employer still pays the R2 000 contribution, the following would happen:

-    Firstly, the employee would be taxed on a salary of only R8 000 (R10 000 less R2 000),
-    Secondly, the R2 000 would be taxed as a fringe benefit in the hands of the employee.

As both the fringe benefits tax and the contribution deduction happen at the same tax rate, the employee's take-home pay is unaffected.                                                                                                                                

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Question: XYZ School is a private school where funds are rather limited.  What will be the most cost-effective way for us to provide our (90) employees with some kind of retirement plan?


Your question touches on two critical points:


  • The most appropriate way to save for retirement, and
  • The importance of cost in the decision-making process.

An employer-sponsored retirement fund, as envisaged by the Pension Funds Act, is typically the most effective way to save for retirement. It offers the following advantages:

1.    Access to a structured and disciplined investment plan that provides benefits in the event of retirement, retrenchment, resignation, disability or death,
2.    Tax-free contributions, investment returns and cash lump-sum payments,
3.    Ancillary group life, disability and funeral cover (if required), and
4.    Lower costs than individuals can secure for themselves.

There are two types of employer-sponsored retirement funds at present:

  • Pension funds, and
  • Provident funds.

The tax treatment of these two types of funds will be equalised in terms of the proposed retirement reform so the choice between the two will become largely irrelevant.  As provident funds will in future have the same annuitisation requirement as pension funds – in other words at retirement, members must use at least two-thirds of their fund credit to purchase an annuity-  it makes sense to just go with a pension fund now.

Membership would be optional for existing employees but compulsory for joining employees

Individuals can, of course, access the tax benefit themselves by investing in an RA. However, RAs are typically far more expensive and contributions are not compulsory. Without the discipline afforded by a compulsory company retirement fund, many investors will fall short by:

  • Investing too little or too late,
  • Incurring too high a cost, or
  • Choosing an inappropriate asset allocation strategy.

Also, with an RA you may only access your savings from age 55 onward, whereas both the present and proposed laws will (within limit) allow employees to access their pension/provident fund savings earlier (once they have left their employer).

A compromise strategy is the Group RA

Here, the contract is still between the individual and the service provider, but the employer:

  • Acts on behalf of the employee,
  • Makes the important upfront decisions, e.g. service provider selection, and
  • Deducts and pays the contributions.

The advantage here is that on leaving the employer, the RA travels with the employee, i.e. employees can then keep contributing in their own name.

Cost is an important consideration

Understand that a balanced portfolio (75% in equities) has historically delivered a real (after-inflation) return of only around 5% per annum – before fees! This means that fees of 2% or 3% reduce your real (wealth-building) return tremendously:

  • The average fee for SA retail investors in a RA is 3%, which means you lose 60% of your real return (actually more like 75%, after compounding for 40 years). It effectively halves the value of your final pension.
  • The average fee for an umbrella fund is still over 2% per annum, also way too high. There are, however, low-cost alternatives in the market that allow the investor to keep most of the investment return.

You should (also) consider cost in deciding:

a) Which administrator you want to choose,
b) If you want to go for an umbrella or stand-alone fund, and
c) If you would prefer active or index investing.

Umbrella or provident fund: Set up a separate legal entity for your employees or join an existing umbrella fund?

For small companies, the cost of maintaining a separate legal entity is too high (both for the company and its employees) to promise value for money. A large umbrella fund offers significant benefits of scale, in particular professional governance and lower average costs per member. These factors directly benefit the investor and the employer through higher returns and lower regulatory risk. The retirement industry is heading strongly in the direction of umbrella funds.

On the choice of investment style:

  • Active managers charge high fees with the prospect that their research and trading may yield a market-beating return.
  • Index investors, on the other hand, capture the market return at a low cost. The trend, globally, is increasingly moving towards indexed retirement investments.  Two factors account for this:

-    Firstly, the average indexed investor will always outperform the average active investor because of their lower investment fees.
-    Secondly, past evidence suggests that only a small percentage of active investors beat their benchmark over an extended period of time after accounting for costs. This small percentage (typically one in twenty) renders the hunt for the superior manager a speculative pursuit.

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Question: What is the maximum salary that applies before the capped amount of R350 000 kicks in?


In terms of the proposed retirement reform, which will likely come into effect on or after 1 March 2015, employees will be allowed to deduct up to 27.5% of the larger of gross remuneration or taxable income, with an annual cap of R350 000.  At the maximum contribution rate (27.5%), this cap would be fully utilised at annual gross remuneration (or taxable income) of R1.273 million.  

Please note that the contribution rate will be applied to gross remuneration, not to salary. To explain this semantic difference by way of example:

  • Currently, some employers may pay a salary of say R10 000 and also make a contribution to a provident fund of R2 000. In this case, the pensionable salary would be R10 000, and the allowable deduction (in the hands of the employer) would be calculated relative to that number.
  • Under the proposed reform, the employee gets the deduction. If the employer still pays the R2 000 contribution to the provident fund, the following would happen:

-    Firstly, the R2 000 would be taxed as a fringe benefit in the hands of the employee,
-    Secondly, the employee would get the deduction, i.e. he would be taxed on a salary of only R8 000 (R10 000 less R2 000) to neutralise the fringe benefits tax,
-    Thirdly, the employee's total deduction would be capped at 27.5% of gross remuneration, which in this case would be R12 000 (R10 000 plus R2 000).

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Question: Will people - who have a double tax agreement with Malta - be affected?


We don't know the nature of 'your' double-tax agreement with Malta, and what aspects are shielded or covered, but these retirement reform presently merely redefine allowable deductions for South African retirement fund members and annuitisation requirements for South African provident fund members, so this should not affect or change anything you have set up in Malta.


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