Question:
Hello I was previously self-employed and was contributing R1 000 per month towards a retirement annuity. I am now permanently employed and belong to my employer's pension fund. Now, as an incentive, any additional contributions we make the employer matches. Would it be wise to cancel my external retirement annuity and rather contribute the R1 000 to my pension? Effectively the total contribution will then amount to R 2000 per month. Any tax implications of this?
Answer:
Portia,
The question you have to ask yourself: will you have more money at retirement saving either R1 000 or R2 000 a month? All else being equal, you will have twice as much money saving R2 000 per month than R1 000 per month.
All else is not equal, of course. Retirement annuity funds are typically more expensive than a corporate pension fund, so you also stand to benefit by paying lower fees. Over 40 years, every 1% (one percentage point) in fees you save, increases your real (after inflation) retirement income by 30%! Most likely, your pension fund will cost at least 1% pa less in investment fees than your retirement annuity (although you must ask the question and compare fees). Ideally, your pension fund should not cost you more than 1% (of assets) pa. Some retirement annuities cost as much as 3% pa.
On the downside, if you stop contributing to your retirement annuity, and make it paid-up, you may incur an early termination or surrender penalty. This is an accelerated recovery of upfront fees - you would have paid these fees anyway, but they would have been deducted over the life of your retirement annuity. If this is a recent retirement annuity, your penalty will be limited to 15% of your capital value. So you should make this up quite quickly if your employer pays in the extra R1 000 pm.
From a tax perspective, the tax deduction on your retirement annuity is presently limited to 15% of your non-pensionable income. Once you joined your new employer's fund, the bulk of your income would most likely have become pensionable, in which case you would already have lost the tax deduction for your RA contribution. This would already have happened, irrespective of whether you top your pension fund contribution or not and so is not a factor in your decision. But note that you may presently only deduct 7.5% of your pensionable salary in respect of your pension fund contribution (your employer can deduct another 20%).
All these rules may change within the next two years, and all retirement fund contributions may then be treated the same for tax purposes. From a tax deduction perspective, it then won't matter whether you save through a retirement annuity or pension fund.
Although we do not advocate this, it is presently easier to access your retirement savings in a pension fund than a retirement annuity fund. With an retirement annuity you can only claim once you turn 55, with a pension fund, you have early withdrawal options on changing employer, or after you have transferred to a preservation fund.
One caveat: if you plan to spend your pension fund savings on a new car five years from now, you would be better off sticking to your retirement annuity, because then at least you would have some money saved at retirement.
