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Johannesburg - The easiest and cheapest way for pension fund members to make better provision for retirement is to contribute more to an employer's pension fund.
An increase in contribution of only 2% could make a big difference to the monthly amount received after retirement.
Not all funds permit larger contributions from employees, but it's worthwhile finding out whether your fund allows this. Some funds also allow lump sum contributions.
Statistics show that 25% of all pension fund members contribute less than 12% of their salaries to their pension funds. The 12% recommended contribution is the level deemed suitable by the department of social development, while the World Bank recommends employee contributions of 10% to 13% of their salaries.
According to financial services firm Alexander Forbes, a larger contribution to a pension fund is one way to ensure that you will receive the recommended 75% of your final salary post retirement. At current rates of contribution, only 62% of all pension fund members will manage this, Alexander Forbes said.
Studies done by Old Mutual Actuaries and Consultants (Omac) show that after retirement most people receive only 25% to 30% of their final salary.
There are various benefits for employees if they increase the contribution, but there are also other factors they need to be taken into account.
Contributions can be increased only if the fund rules permit. It is certainly the cheapest way to make additional provision for retirement, says John Anderson, head of consulting strategy at Alexander Forbes.
Craig Aitchinson, MD of Omac, says the first step in discovering whether a larger contribution is necessary is to determine whether the saved amount is sufficient to provide for post-retirement needs. This information is not necessarily reflected in the pension fund's statements, but it is available.
The second aspect that people need to keep in mind is tax.
A retirement annuity is a better option for individuals paying a higher percentage of tax on withdrawals from the pension fund.
Members to pension funds need to keep in mind that contributions to a provident fund cannot be deducted from tax. However, tax deductions are permitted after retirement. The additional contributions that employees pay are not tax-deductible.
Other investments like endowment policies or unit trusts can also be used, but the tax implications need to be taken into account.
Another of the benefits of increasing the contribution to the employer's fund is that the investments are designed to be long-term. It is generally accepted that people need to save at least 15% of their monthly salary for 40 years in order to retire in comfort.
You can also just retire later, if the company permits this. By stretching retirement age from 60 to 65, the eventual pension payout could be between 10% to 30% higher, Aitchinson says.
Postponing retirement not only saves more, but the post-retirement period becomes shorter, increasing the monthly amount available.
- Sake24.com
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