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Retirement Funds: Provident and Pension Funds vs Retirement Annuities

04/04/2013 • • by
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Trying to understand retirement products can be rather daunting at times. However once you learn the basics, retirement planning becomes easier to deal with. This first article in a two-part series will attempt to shed some light on the three most widely used retirement products in South Africa: 
  • Provident Funds
  • Pension Funds
  • Retirement Annuities
The content of this article is based on 2013 legislation and is subject to change in future. The Basics
Provident Fund Pension Fund Retirement Annuity
Membership requirement Provident and Pension funds are retirement funds offered by employers to employees. These funds can only be set up for groups of employees and therefore cannot be set up if an employer/employee agreement doesn’t exist. Provident and Pension Funds can therefore not be set up in a personal capacity.  Retirement Annuities can be taken out in a personal capacity. An employer /employee agreement is not required. Employers can however offer their employees Retirement Annuities as a retirement savings vehicle in the form of Group Retirement Annuities.
Provident and Pension funds are the same in terms of membership requirements, however their taxation and withdrawal structures differ considerably.   
  Important Definitions: Retirement-funding income – Income that is taken into account when determining any contributions made to an employer retirement fund such as a Provident or Pension Fund, your salary in other words. Non-retirement funding income – Income that is not taken into account when determining any contributions made to an employer retirement fund such as a Provident or Pension Fund such as rental income, etc. In the event of self employed individuals or individuals whose companies do not have retirement funds in place their full income is seen as non-retirement funding. Tax Deductibility 
Provident Fund Pension Fund Retirement Annuity
Employer Up to 20% of your remuneration contributed towards a Provident or Pension Fund can be allowed as a tax deduction for your employer. Your employer cannot claim any tax deduction for your contributions towards your retirement annuity.
Employee The employee cannot claim any tax deduction for his contributions towards a Provident Fund. The employee can claim a tax deduction of the greater of:
  • 7,5% of remuneration from retirement-funding income
  • or R1750
   
The employee can claim a tax deduction of the greater of:
  • 15% of non retirement-funding income
  • or R3 500 less contributions to a pension fund
  • or R1 750
 
  Example of Retirement Annuity Tax Deductibility:  Mr. X earns R30 000 monthly as a company employee and does not belong to a Pension or Provident Fund.  To determine Mr. X’s tax deductible amount the greatest of the tax deductible amounts are calculated as follows:
  • R360 000 per annum x 15% = R54 000 per annum towards his RA* (R4500 monthly)
  • R3500 per annum or R292 per month
  • R1750 per annum or R145 per month
 
*RA = Retirement Annuity
 
Keep an eye out for tomorrow's instalment of this series, in which the following will be discussed: the withdrawal options associated with Provident and Pension Funds and Retirement Annuities, as well as the tax implications of these retirement funds.
  For those interested in retirement planning speak to your financial planner for assistance and financial planning advice. You can also email Raul Jorge. References:  Botha, M. et al., (2012). The South African Financial Planning Handbook 2012. Durban: LexisNexis. 868 - 873.  Cloete, S. et al. (2012). Premiums & Problems. Cape Town: Old Mutual. C8 – C18. SARS. (2013). Tax Pocket Guide. Available: http://www.treasury.gov.za/documents/national%20budget/2013/sars/Budget%202013%20Pocket% 20Guide.pdf. Last accessed 31st March 2013.

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