Question:
I contribute towards a provident fund with my employer and am thinking of taking out an RA, but I have noticed that the latter is the highest costing retirement investment. I want to know whether it would make sense to increase my provident fund contributions or purchase an RA?
Answer:
Melissa,
The product cost is an important consideration in selecting the appropriate savings vehicle. In choosing between your provident and a retirement annuity, you should therefore definitely do a cost comparison between the two. Typically, an occupational retirement fund – a group product – is cheaper than a retirement annuity, which is a product for the individual. However, not all RA’s are expensive. The 10X RA, for example, only charges one fee, based on a sliding scale starting at 0.9% pa (plus VAT).
Cost is just one consideration however. Other factors you may want to compare are issues such as investment style (active or indexing), reporting transparency, the quality of oversight (trustees), and how your money is invested (in what asset classes).
Also be aware that presently, only your employer can contribute to a provident fund. If you want to increase your contribution, this would have to be by way of an increased salary sacrifice. This must be permitted by your provident fund’s special fund rules. This rule (as to who is allowed to contribute to a provident fund) is due to be changed in the next two years, as part of our retirement reform.
Finally, you also need to consider that, presently, contributions to an RA can only be deducted from non-pensionable income (limit: 15%). If you presently contribute to a provident fund, chances are that your entire employment income is deemed to be pensionable income (the income off which your provident fund contribution is calculated). This means that you will not be allowed to deduct ANY of your RA contribution for tax. This rule, too, will change under the proposed retirement reform, and the distinction between pensionable and non-pensionable income will fall away. You will then be allowed to contribute and deduct 22.5% of your total income (if you are under 45, 27,5% if you are over), irrespective of the savings vehicle you use (pension, provident or RA fund).
