The ABCs of retirement planning

Hands up, if you, like most people, don’t know your provident from your pension fund and everything retirement-related leaves your head spinning.

We all know that saving for our retirement is one of the best gifts we can give ourselves. But so many of us put it off because we don’t know where to start, and all the jargon and different retirement options can be confusing.

We want to help you set yourself up to have the retirement you’ve always dreamed of. In this article, we’re going to simplify some of the retirement jargon that you will come across as you navigate this journey.

First things first, let’s consider there’s two ‘types of money’ when you save for your retirement:
voluntary savings – money you save independently from an employer and you can use as you like; or
compulsory savings - money you save through an employer, which you must use for compulsory investments to give you a retirement income.

You can save for your retirement using one of the following retirement saving solutions: 

A pension plan: This is a good option if you work for an employer that has a pension fund and you want to secure your retirement savings so that you can’t use it for something else. You’ll have to buy an income plan that will provide you with an income in your retirement. A pension fund can provide other benefits which are payable when you pass away or in the event of ill-health retirement. These benefits will vary based on each pension fund.

A provident plan: This is a good option if you work for an employer that has a provident fund and you want more flexibility to access your retirement savings and you don’t want to be limited to use it specifically for securing an income in retirement.

A retirement annuity: This is a good option if you are self-employed or if you want to save for your retirement independently from your employer and secure your retirement savings so that you can’t use it for something else. You’ll have to buy an income plan that will provide an income for you in retirement.

A preservation plan is specifically designed to receive lump sum benefits from a pension or provident fund when you resign from your employment before retirement, to continue growing your retirement savings.

You get two kinds of preservation funds:
A pension preservation fund: If your retirement savings from your employer is in a pension fund, you’ll transfer it into a pension preservation fund.
A provident preservation fund: If your retirement savings are in a provident fund, you'll transfer your retirement savings from your employer's provident fund into a provident preservation fund.

An annuity or income plan is a plan where you invest your retirement savings, which then pays you a regular income in retirement. As a member of a pension, pension preservation, or retirement annuity fund, you must use at least two-thirds of your retirement savings to buy an income annuity.

What do I do with my retirement savings if I change jobs?
If you have retirement savings and you change jobs before you retire, you have the following options:
The most straight-forward option is if your new employer offers the same retirement saving plan that you had with your old employer, which means:
If your retirement savings are in a pension plan with your old employer, you can transfer your savings from your old employer's pension fund to your new employer's pension fund, and you'll pay no tax on the transfer.
If your retirement savings are in a provident plan with your old employer, you can transfer your savings from your old employer's provident fund to your new employer's provident fund, and you'll pay no tax on the transfer.

If you don't have the option to do a straight-forward transfer from one pension fund to another pension fund or from one provident fund to another provident fund, you have the option to transfer your money into a PRESERVATION plan. This means:
If your retirement savings are in a pension plan with your old employer, you can transfer your savings from your old employer's pension fund to a pension preservation fund, and you'll pay no tax on the transfer. Your savings will continue to grow in the preservation fund, and you won’t pay tax on the growth or interest earned. You only pay tax when you access your money, based on the lump sum tax table.
If your retirement savings are in a provident plan with your old employer, you can transfer your savings from your old employer's provident fund to a provident preservation fund, and you'll pay no tax on the transfer. Your savings will continue to grow in the preservation fund, and you won’t pay tax on the growth or interest earned. You only pay tax when you access your money, based on the lump sum tax table.
If your retirement savings are in a retirement annuity, it will not be affected as the retirement annuity is independent of any employer and you can just continue your contributions as usual.

What are my options when I retire?
If your retirement savings are in a provident fund when you retire:
If you bought the plan before 1 May 2021, you will be able to withdraw your full retirement savings amount as a lump sum (cash) when you retire, and you'll pay tax on the amount based on the lump sum tax table.
If you bought the plan after 1 March 2021 when new legislation came in, and your total retirement savings amount is less than R247 500 when you retire, you can withdraw the full amount at retirement and you’ll pay tax on the amount based on the lump sum tax table.
If you bought the plan after 1 March 2021 when new legislation came in, and your total retirement savings amount is more than R247 500, you can access 1/3rd of the amount as a lump sum when you retire on which you'll pay tax based on the lump sum tax table. The other 2/3rd of the savings amount is compulsory money and you must use it to buy a retirement income plan.
Once you start drawing an income in retirement, you'll pay tax on the amount you receive that works the same as when you were earning a salary while you were working.

If your retirement savings are in a pension fund when you retire:
Your pension savings are calculated based on the formula your company uses to determine your retirement benefits, and the amount is usually based on your years of service, your position on a sliding scale related to a value, the number of leave days you've accumulated, etc. The details of your benefits can usually be found in your work contract with your employer. If your total retirement savings amount is less than R247 500, you can withdraw the full amount at retirement. If the amount is more than R247 500, you can access 1/3rd of the amount as a lump sum on which you'll pay tax based on the lump sum tax table and the remainder 2/3rd of the savings amount is compulsory money and you have to use it to buy a retirement income with.
Once you start drawing an income in retirement, you'll pay tax on the amount you receive that works the same as when you were earning a salary while you were working.

If your retirement savings are in a retirement annuity when you retire:
If your total retirement savings amount is less than R247 500, you can withdraw the full amount at retirement. If the amount is more than R247 500, you can access 1/3rd of the amount as a lump sum on which you'll pay tax, based on the lump sum tax table and the remainder 2/3rds of the savings amount is compulsory money and you have to use it to buy a retirement income with. Once you start drawing an income in retirement, you'll pay tax on the amount you receive that works the same as when you were earning a salary while you were working.

Now that you have a better understanding of some of the more common terms and phrases around retirement, you are better able to decide which option is best for you. However, speaking to a qualified financial adviser will help you plan for and achieve your financial goals, setting you up for a better future.
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