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WTF! What The Fund?

Article by Yugen Pillay – Associate Director: Economic Transformation Services (ETS)Sizwe Ntsaluba Gobodo

As an associate director in a professional services firm, like clockwork every Monday, my team and I discuss different approaches to increasing our sales. Recently we explored the option of cold calling, seems like a great idea (thinking it worked well in the Wolf of Wall street) and relying on the Pareto principle we figure that the more rods we have in the water the more likely our chances of catching many fish.

However later that week I was on the receiving end of a cold call. After facilitating a 4 hour Economic Transformation workshop I noticed that I had 3 missed calls from the same landline number. I was just about to dial back as it seemed really urgent, when my cell rang from the same number. I quickly answered with an array of thoughts transpiring in my head.

‘Hello’, I answered and on the other side of the line was a vague voice. “Good day Sir, my name is Simon, I am calling from xxx financial services company and I was wondering if you would be interested in a retirement annuity.” My first reaction was an irritable prompt ‘No’ as I have a broker handling my finances and I also asked him if he actually sells this product by cold calling unsuspecting clients. Simon answered that he has quite a successful hit rate.

I wondered how many people actually know the almost lifelong commitment that they get themselves into as well as the type of fund that they are signing up for.

Here are the simple characteristics of the different type of funds e.g. pension fund, provident fund and retirement fund so that you are well informed if Simon happens to call you one day.

The main difference is that if a pension fund member retires, the member gets one third of the total benefit in a cash lump sum and the other two-thirds is paid out in the form of a pension over the rest of the member’s life.

A provident fund member can get the full benefit paid in a cash lump sum.

Pension Fund

  • A pension fund is established by the employer and there are monthly contributions by the employer and employee.
  • The contributions will appear on your IRP5 and a portion can be utilized to lower your taxable income on your income tax return.
  • If drawn out before retirement, the lump sum will be taxed in full.
  • In the case of death, dependents will usually be paid out a lump sum. Alternatively the fund will begin paying out at retirement or if you become disabled before that.
  • When you leave a company, you can withdraw your full pension savings, irrespective of your age.

Provident Fund

  • A provident fund is established by the employer and there are monthly contributions by the employer.
  • The contributions will appear on your IRP5 and a portion cannot be utilized to lower your taxable income on your 2016 income tax return
  • The provident fund is usually more flexible than the pension fund.
  • Part of the lump sum can be used to buy a private pension through a private pension company. The main advantage of a pension fund is that it is paid for life.
  • The pension will be paid out until you die. This offers you security because a certain amount of money will be coming in every month.
  • If you are not disciplined to deal with a large sum of money, then it is better to get the money paid out in small amounts every month.

Retirement Annuity

  • This is a retirement investment plan you set up as an individual, unrelated to your place of employment.
  • The contributions can be utilized to lower your taxable income on your tax returns.
  • A retirement annuity cannot be drawn out until you reach the age of 55 or unless death or disability occurs.
  • A retirement annuity differs from a pension fund in that in the event of death, a retirement annuity will only pay out one third to the dependents as a lump sum, and the rest will be used towards a monthly pension.

When making a decision the same rules will not apply to everyone:

  • If you are climbing the corporate ladder in a large entity, a pension or provident fund would be best as it would pay out a larger benefit at retirement.
  • If you have a more active career and you change jobs frequently a retirement annuity could be wise because you will not run the risk of spending your retirement savings between jobs.

When making the decision it is important to look at your present, where you heading in your future, your company, your options and your career path before you decide.

Good luck and happy investing.

Sizwe Ntsaluba Gobodo is a proud partner of the National Small Business Chamber (NSBC).