A Fin24 user who is working as a state doctor wants to know her best options for retirement. She writes:
I have been working as a doctor for two years. At the beginning of my career with the government, I was given the choice to either belong to the government pension fund and enjoy other benefits such as medical aid and a 13th cheque, or take all my money home and sort myself out.
I chose to take my money and opened a retirement annuity (RA).
I now know that I want to be a state doctor forever, and am wondering if I should close my retirement annuity and join the government pension fund. Or should I keep the RA regardless?
What are the advantages and disadvantages of having either an RA or a pension fund?Jaco Gouws, investment product manager at Old Mutual, responds:
In internship, the doctors have a choice of either taking the benefits package (the government holds back about 36% of their salary to pay towards the Government Employee Pension Fund [GEPF], medical aid and a 13th cheque) or the cash option which is the full amount, minus tax.
With the latter option, the individual would have to shop around for the benefits (eg pension, medical aid, etc).
In community service, registrarship or working as a medical officer (MO: fully qualified as a doctor in government), there is only one option - the benefits package. This means that at this stage, GEPF membership is compulsory for the doctor.
I would suggest you keep the savings you already have in the RA as you have already received tax relief on your contributions and you won’t pay any tax on future growth.
The GEPF is a very comprehensive pension fund which, along with your savings from your retirement annuity, will enable you to save the maximum for your retirement years as both are tax-incentivised retirement savings vehicles, ie you get tax benefits on both savings options.
The latest Old Mutual Savings and Investment Monitor, which surveys savings and investment trends among working South Africans in major metropolitan areas, found that 37% of households still claimed to be saving less than they were a year ago. Only 35% were saving towards their retirement.
The monitor found that 20% of respondents were not sure if they would have enough money to retire. It also found that an increasing number of people plan to work past retirement because they are afraid that they have not saved enough for retirement.
The advantage of an RA is that it supplements your retirement savings in addition to your pension, to ensure that you have saved enough for your retirement.
For a pension fund, the tax deductible savings are limited to the greater amount of:
- 7.5% of retirement funding income (your salary and bonus); or
- R1 750 per annum.
For a retirement annuity, tax deductible contributions are limited to the greater amount of:
- 15% of non-retirement funding income (eg investment income, rental income - any income that is not part of your salary that you receive from employment) after taking into account all attributable deductions, apart from tax deductible donations, tax deductible medical expenses and certain farming losses and expenses; or
- R3 500 less the deductible current pension fund contributions; or
- R1 750.
It is advisable to speak to a Financial Advisory and Intermediary Services accredited financial adviser with a proven track record, and who is affiliated to a credible financial services provider such as Old Mutual.
The financial adviser will help you make the most of your tax-deductible contributions to a retirement annuity and a pension fund.
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