Purchase extra years of pensionable service, or put cash into an RA?

To begin, I feel it is very important have a superb understanding of the 2 varieties of retirement funds.

Authorities Worker Pension Fund (GEPF)

The GEPF is an outlined profit fund, which means that the advantages are outlined within the guidelines of the fund, in contrast to an outlined contribution fund the place your accumulation of funds makes up your pension pot.

The advantages are assured and don’t rely upon how a lot the member and employer have contributed. The advantages are calculated in line with a set formulation, which takes into consideration the variety of years of service and your common wage during the last two years labored. Your advantages are made up of two components for those who retire with greater than 10 years of service, specifically (a) a once-off lump sum higher often known as a gratuity, which you’ll make investments or take as money, and (b) a month-to-month pension also referred to as an annuity.

In case you are married or have a life associate, you possibly can choose an quantity of your month-to-month pension you prefer to your partner/life associate to obtain after your demise. Usually, when a GEPF member dies, the partner is entitled to obtain 50% of the month-to-month pension that the member would have obtained. Nonetheless, this month-to-month pension will be elevated to 75% if the member needs. It is very important observe that the impact of accelerating your partner’s pension to 75% both reduces the gratuity or annuity that you’re going to get once you depart the fund.

Retirement annuity (RA)

A RA is a retirement fund when it comes to the Pension Funds Act. It’s a tax-effective funding automobile designed for particular person buyers versus staff who contribute to a office retirement fund reminiscent of a pension or provident fund.

A retirement annuity is good for people who find themselves both self-employed, wouldn’t have entry to a work-place pension or provident fund by means of their employer, or need to complement their pension or provident fund financial savings.

At retirement, it’s possible you’ll take as much as one-third as a money lump sum, topic to retirement lump-sum tax, and no less than two-thirds should go in direction of a obligatory annuity. Obligatory annuitisation applies to fund balances above R247 500, and any quantity beneath R247 500 will be absolutely withdrawn. If you happen to personal a number of RAs in a single fund (for example, you may have two RAs in an Allan Grey Fund), then the annuitisation requirement considers the combination worth of your RAs.

Buy of service, GEPF

The older you’re once you begin planning on your retirement, the much less time there may be to be sure to have sufficient on your outdated age.

You possibly can be going through this drawback for those who began working for the federal government late in your working life and didn’t belong to a pension fund earlier than.

It may also be an issue when you’ve got taken lengthy intervals of depart with out pay throughout your profession with the federal government and thereby missed making your pension contributions.

You’ll be able to rectify this by paying an additional quantity (that each you and the GEPF board of trustees can agree on) in direction of shopping for extra years of pensionable service.

Buy service grants you an extended interval of pensionable service, which suggests you find yourself with a bigger pension once you retire. Happily, GEPF gives you a technique to enhance your pensionable service – which suggests a greater retirement profit. 

Evaluating the price of buy of service can solely be executed when a member is a contributing member on the time they apply for buy of service. The GEPF will give you an individualised citation, taking into consideration particular circumstances. In consequence, it isn’t attainable to give you an correct comparability, however you’re welcome to request such a citation from the GEPF if you’re a contributing member and your monetary advisor will be capable to give you a comparability between the 2 choices.

The professionals and cons of the 2 varieties of funds 

Execs of the GEPF

All GEPF advantages are outlined within the Authorities Staff Pension Legislation and guidelines, which is why GEPF is known as an outlined profit fund and never a contribution fund. The benefit of belonging to an outlined profit fund is that your advantages are assured. Regardless of the efficiency of the markers or particular person investments inside the GEPF, a member receives a assured pension on retirement, no matter whether or not the funding markets rose or fell within the years earlier than retirement. Advantages are protected in opposition to inflation. The GEPF has a stable observe document in safeguarding the worth of its members’ retirement wealth and in defending its pensioners in opposition to inflation.

Based on GEPF fund guidelines, the annual pension enhance paid to its pensioners should be no less than 75% of the common enhance in client inflation from December 1 to November 30 of the earlier 12 months. The members’ pensionable pursuits are safeguarded because the fund has very strict guidelines in regards to the type of advantages they have to pay and the way they have to make investments. These guidelines are contained within the Authorities Staff Pension Legislation, Proclamation 21 of 1996, and guidelines issued thereunder. Your individual contributions to your retirement fund, plus your employer contributions to your retirement fund, are tax-deductible as much as sure limits. Tax is barely payable in your advantages once you entry your funds (i.e. upon resignation or retirement).

Cons of the GEPF

Retirement age is ready out within the guidelines of the fund and you may solely retire on the retirement age set by the GEPF (versus a retirement annuity fund, the place members can retire from age 55 and there’s no higher age restrict, which means they’ll retire at any time from age 55). With the GEPF there may be additionally no flexibility in the way you obtain your pension – you can not enhance or lower your pension cost in line with your revenue requirement. As well as, when you and your partner have handed away, the profit stops and you can not depart a legacy to your youngsters for example.

Execs of an RA

If the overall quantity within the fund is lower than R247 500, you aren’t restricted to taking as much as one-third of your financial savings as a lump sum. You’ll be able to take the complete quantity as a money lump sum, topic to tax. Subsequently, no annuitisation is required if the fund is lower than R247 500. The expansion and revenue inside your fund, when you’re a member of the fund, is tax-free and tax is barely payable once you entry your funds.

A spread of funding choices is obtainable from which you’ll choose to fit your threat profile and progress aims. These choices additionally embody offshore investments, topic to Regulation 28 of the Pension Funds Act. When you retire from an RA, funding homes provide a spread of income-generating options for the obligatory annuity portion. These have been developed to deal with your particular wants and circumstances. Your alternative will rely upon whether or not you need a assured revenue, a various revenue primarily based on the efficiency of your investments out there, or a mix of each.

By contributing to an RA, it is possible for you to to scale back your tax legal responsibility yearly once you submit your tax returns. Since March 1, 2016, RAs qualify for a similar tax incentives as pension and provident funds.

Chances are you’ll deduct contributions to an RA fund as much as 27.5% of taxable revenue or gross remuneration (whichever is greater) for tax.

It is very important observe that the 27.5% restrict applies to the combination of contributions to all funds (pension, provident and RA). The general tax-deductible restrict is R350 000 each year.

Contributions over R350 000 could also be rolled over to future years however might be topic to the bounds relevant in these years. There isn’t any most age at which you might want to cease contributing to an RA, or at which you might want to entry your RA (you possibly can solely retire from an RA from age 55 onwards).

Cons of an RA

The advantages that you’ll obtain at retirement will rely upon the fund choice that you just made, which signifies that the funding threat is positioned on the member and never the fund.

From the above, it ought to be clear that the choice whether or not to buy extra years of service within the GEPF or to contribute to an RA will rely in your private circumstances and the life-style that you just wish to lead someday. These are questions suitably certified monetary planner will be capable to help you with after taking all of your private circumstances into consideration.