Happy to always have you around. Now that you have begun to realize that a pension funds are not all rosy as you might have thought ( read the article here), it is important to cover some of the different types of saving schemes relating to retirement. My goal is to ensure that you improve your financial knowledge so that you can become better at managing your money.
So pension, provident, retirement , preservation and annuities, which one is which? What is the key differences between them ?
A pension fund is a retirement saving product normally offered by your employer. This is a condition of your employment and employers normally have clauses in their pension fund schemes on who is eligible to be part of the pension fund scheme. This may or may not be compulsory, it all depends on your employment contract.
The main key feature with a pension fund is that, upon retirement, you can only take out 33.3% of the money as a lump sum and the remaining portion will be accessible as a monthly payout. During your years of contributing, you get a tax deduction from the receiver of revenue limited to N$40 000 and therefore when you retire , your payouts will also be subjected to tax.
A provident fund on the other hand can also be offered by your employer as part of your employment contract . Your employer is also entitled to have rules about whether it’s optional or mandatory to be part of the provident fund.
The key feature here is that once you retire, you will can pull out 100% of the value of your fund at once. Similarly since the contribution to the provident fund are deducted by your employer when calculation the PAYE that you should pay monthly, the payout is also taxable. Like the pension fund, you also have an option to take out a portion in a lumpsum and leave the remainder of the money to be paid out in installments.
In both the above two cases, if you leave your job before reaching retirement, you can do one of the following:
- Leave the money in the pension fund until you retire and just hope that a few years down the line you will remember that you never claimed your money. This is really risky because if the company forget about your or lose your contacts, they might not have the means to reach your for you to claim your benefits. ( I do not advise this)
- Get your money in cash and do whatever you want to do with it. This might be advisable if you are still young and still have some time to think about what you want to do. It will help if you can use the money in something that will generate returns that are higher than what you would get if you kept your money in the fund or transferred it to another fund.
- You can also transfer it to another pension or provident or preservation fund. This is what I would say do if you are close to retirement or know if you take the money you will end up squandering it on something that is not worth it.
A preservation fund is exactly what it means. It is a fund solely there to preserve the contributions already made by the employee. It is used as a housing scheme for amounts that are transferred from other provident or pension funds. So one cannot decide to continue with the monthly contributions on the money they transfer to a preservation fund. If you wish to increase your retirement savings , you will need to join a new one.
And finally, annuities on the other hand are investment products that you contribute to on a monthly basis and in return they will pay you a monthly premium from retirement until you die. Unlike annuities, your pension or provident fund will only pay you out the value of your investment, which may run out within the first 5 years of your retirement if you did not save enough for retirement. On the other hand, your retirement annuity has a life time guarantee.
Now that you understand what each fund is about , can you identify which savings scheme are you falling under? Maybe you want a retirement car to buy with your pension payout, did you know that you could only take out 1/3 of the money under a pension fund? will your 1/3 be able to pay off your house, buy a retirement flat or you should be making a plan B?