Question:
I am part of an employer scheme with a pension provident fund. I can still increase my employer contributions from 7.5% to 20%. Currently my contributions are 7.5% and total pensionable earnings is 80% of our guaranteed package. Should I increase my contributions to the max, or take out a retirement annuity, or a mix? Which would be more beneficial, considering the prices of annuities when I retire? I am 22 years old now and assuming I will retire at age 60.
Answer:
James,
Given your young age, and the pending pension fund reform, I think that your questions regarding whether to choose pension, provident or retirement annuity will become largely academic.
The reason is that government plans to standardise the treatment of these vehicles in due course. Although vesting rights will be protected (this refers to provident funds, which enable members to take the full fund benefit as cash at retirement), the amount involved will be negligible by the time your retire. So, in future, you will be allowed the same deductions for pension, provident and retirement annuity funds, they will be subject to the same mandatory preservation, and the same compulsory annuities at retirement (at least two-thirds of your fund proceeds). The cost of the annuity will be independent of the source of the money (ie pension, provident, retirement annuity). You will have to shop around when your retire, to get the best rate.
As a general rule, we believe that a work place fund is a better proposition that an retirement annuity as you typically invest at wholesale rather than retail rates (this may not hold true for small occupational funds, which may get taken for a ride [fee-wise] by some service providers). So topping up your pension/provident fund would make more sense than taking out a separate retirement annuity.
An retirement annuity really only makes sense if you are self-employed or do not have access to a work place fund, if you are not allowed to top up your work place contribution, or if you earn a lot of non-pensionable income, and you want to max out your tax deduction.
Having said all that, you need to consider some essentials in selecting your funds, in particular the investment style (active or indexing) and fees (the lower the better). If your work place fund charges high fees, you may well be better off topping up with a low cost retirement annuity, as the long term negative impact of fees is very dramatic.
