Pension fund/provident fund contributions
What is your pension fund/provident fund contributions?
Most employers deduct an amount from your salary for retirement savings (pension and provident fund). Sometimes employees are given the opportunity to decide what percentage of their salary they want to contribute and other times the employer chooses a percentage. There is some flexibility, but you need to understand how that works, what the company has put in place for you and what your options are. These deductions, called contributions, that employers have put in place are not optional, but that’s a good thing. Because retirement contributions are tax-deductible, it is one of the most effective ways to save. More importantly, you are paying this money towards a better future for yourself.
All your retirement contributions are shown on your payslip. Whether you are starting on a job or changing jobs, it is important to look at each deduction on your payslip to understand what they mean.
It is also important to check whether you belong to a pension or provident fund. The biggest difference between the two is that when you have a pension fund, you can take as much as a third of your money as a cash lump-sum payout when you retire. The rest will be invested and paid out to you as a monthly pension, as long as there is money available. This helps to ensure you don’t blow through all your lifelong savings in a short period!
With a provident fund, all your money is paid out in one cash lump sum when you retire, which is not necessarily a bad thing, as long as you invest that money early on – and wisely.
All contributions towards retirement savings (pension or provident fund) are tax deductible, up to certain limits set by SARS.
While we don’t have a quick formula to help you choose the best option, there are many ways to get sound financial advice from a financial advisor who will consider factors such as your income and retirement goals.
Why should I contribute?
There seems to be a common misconception that pension is only for one’s parents or grandparents and not for the younger generation, or that people have a lot of time to worry about that. In fact, you need to save a little every month over a long time to ensure that you have enough for when you reach retirement.
For many South Africans, pension or provident fund contributions are their only form of saving for retirement. Aside from the fact that it helps lower the tax on your income package, it encourages you to start saving early on. That is why many people prefer to work for companies that offer employee benefits.
Even the people who put some money away for retirement are often not putting away enough. The average amount that South Africans are saving to buy a pension at retirement is 22% short of what they actually need. That means that someone who wants to earn R10 000 per month when they retire, will actually earn R2 200 less. Would you be able to decrease your income by that much currently?
What’s more, the National Treasury states that only 6% of South Africans are on track to retire with a decent amount of savings. This means that you are most likely not on track! The best way to make sure that you are part of the 6% is to start investing from the day that you start working, even if it is just a very small amount every month.
What happens if I resign?
When you make the decision to leave an employer you have a few options. Generally, people opt to have the funds transferred to the new employer’s retirement fund, but you can also opt to have it paid out or transferred to a preservation fund. The money you withdraw will mean that you can withdraw less from your pension fund when you retire, and with less money for the last years of your life, so it is vital that you make sure you take this into account when you make your decision.
Withdrawal benefits are paid to employees who leave and, often, employees see this as a bonus when changing jobs, but this could have a terrible effect on your retirement years, especially since these benefits are taxed before they are paid out. Protecting your hard-earned retirement savings is the best way to secure your future and a happy life once you’ve retired.
