Key considerations for retirement contributions
By Adél Gräbe, Legal and Technical Specialist
How much a member contributes to their retirement fund (pension fund, provident fund and/or retirement annuity fund) depends on two factors – their remuneration and their contribution rate.
The rules of the fund
These two factors are defined in the rules of the fund. Pensionable salary, on which the contribution rate is based, can be either set or flexible, and contribution rates either one rate that applies to all members or flexible rates from which a member may choose, within set parameters.
The maximum tax-deductible contribution rate is 27.5% of the greater of remuneration or taxable income, subject to a limit of R350 000 per year, to all the retirement funds to which the member contributes. Should a member contribute more than R350 000 per year, contributions over R350 000 do not qualify for a tax deduction at contribution stage. Therefore, this portion will be funded by after-tax income.
The question arises whether such contributions are the best way to save for retirement, or whether alternative savings vehicles should be considered.
Factors to be considered
The factors to be considered are the following:
- Investment restrictions – retirement fund investments are subject to Regulation 28 of the Pension Funds Act, which provides inter alia that a retirement fund may not invest more than 75% of its assets in equities and no more than 10% in hedge funds. Although retirement funds currently only need to comply with Regulation 28 on fund level and not on member level, and some funds offer investment choices with higher equity exposure, these limitations should still be considered. Conversely, investment growth earned in retirement fund portfolios is not subject to capital gains tax payable by the member.
- Accessibility – given the introduction of the two-pot retirement system, the fact that two-thirds of future contributions will be locked into the retirement pot should also be taken into account, as the value in the retirement pot will have to be preserved and used to provide a pension when the member retires.
- Fees – fees in retirement funds are negotiated based on the size of the fund. A large standalone fund or umbrella fund may be able to negotiate lower administration and investment fees than a fund member may be able to secure for investments in their personal capacity.
- Taxation – should the member contribute more than R350 000 to their retirement fund, these after-tax contributions will not attract tax when a lump sum is paid to the member upon their exit from the fund. If it amounts to more than the allowable lump sum on retirement, it may be used to reduce the monthly taxable amount of any annuity (pension) payable to the member. In this way, members could become entitled to a tax-free income until the full tax-free sum has been paid to them.
- Death – the payment of death benefits by a retirement fund is subject to section 37C of the Pension Funds Act. This means that the board of management of the fund has the discretion to determine the distribution of the benefit to dependants and nominees, and the benefit does not form part of the estate of the deceased member.
A personal choice
Deciding whether to make contributions to a retirement fund in excess of the tax-deductible amount or to rather invest the monies elsewhere is a personal choice and would depend on factors such as the member’s view on retirement fund investment restrictions, fees that can be secured in private investments, and taxation. Decisions regarding long-term retirement fund savings should not be taken lightly and it is recommended that certified financial advisers be consulted.
Read the article from FAnews Magazine-Online November 2024 edition