Issue: July/Sept 2010
Back to basics 4
Different types of group retirement funds
In need of a refresher? Joanne Miller of InvestmentWise, which specialises in trustee training, sets out some fundamentals.
There are two different types of group retirement funds:
- Pension funds, and
- Provident funds.
The main differences between them are in the taxation of contributions made to the fund and in the benefits taken on retirement.
- Employee contributions to pension fund a are tax deductible up to a certain level, whereas employee contributions to a provident fund are not tax deductible. (The reason for this difference is to encourage membership of pension funds, as government would prefer fund members to receive a steady monthly income on retirement rather than take their benefit as a lump sum.)
- Only one-third of the retirement benefit in a pension fund may be paid to the member as a cash lump sum. The balance must be taken as a pension. In a provident fund the full benefit may be taken as cash on retirement.
Pension funds are therefore more tax-efficient for employees than provident funds. However, the retirement benefit is more restrictive in pension funds than in provident funds i.e. the member of a provident fund can invest or spend his benefit as he wishes.
Irrespective of whether a person is a member of a
pension or provident fund, the fund’s administrator is
required to withhold tax from the retirement benefit (the
lump-sum payment and the monthly pension).
- The first R300 000 of the cash lump-sum retirement
benefit will be exempt from tax. Amounts above
this are taxed according to a sliding scale. Any
contributions that were not previously tax exempt (i.e.
member contributions to a provident fund) will be
added to this R300 000 tax-free portion;
- The monthly pension amount received by the
member is subject to tax according to PAYE tables.
Taxation of contributions
||Employee contributions of up to 7,5% of employees pensionable
salary will be tax-free or R1 750 (whichever is the greater).
||Employee contributions to the fund are not tax deductible.
||Employer contributions of up to 20% of the employees pensionable salary can be claimed by the employer as a tax deduction.
||Employer contributions of up to 20% of the employees salary can be claimed by the employer as a tax deduction.
In the case of a member who earns R10 000 per month and is contributing 7,5% of his salary per month to a group retirement fund:
- If he belongs to a pension fund, the employer will
deduct R750 from his monthly salary before calculating PAYE on the net amount (after the
deduction) of R9 250;
- If he belongs to a provident fund, the employer will still pay R750 over to
the fund on the member’s behalf, but will calculate PAYE on his full salary of
R10 000 per month.
||A maximum one-third of the benefit
amount may be taken as a cash lump
sum, with the balance (i.e. at least
two thirds) of the retirement benefit
being paid as a lifelong pension.
||The member is entitled to take his /
her entire benefit as a cash lump sum
In the case of a member who retires with a fund value of R900 000:
- If he belongs to pension fund a , he can take a maximum of R300 000 of this retirement benefit as a cash lump sum and will be required to take the balance as a monthly pension;
- If he belongs to provident fund a , he will be entitled to take the full R900 000 as a cash lump sum.