Small and medium-sized businesses, for which stand-alone occupational retirement funds are not cost effective, should be considering retirement annuities (RAs) as savings vehicles for their employees because of the downward pressure on the costs of RAs.
They could be a lot more cost-effective than the umbrella retirement fund options, which all too often are riddled with problems of full disclosure, proper governance and high costs.
The other problem with umbrella retirement funds is that when members resign, are retrenched or otherwise lose their jobs, they need to transfer their accumulated savings to a preservation fund. This comes at extra cost.
If an employee saves for retirement through an RA and changes employers, the accumulated savings can be left in the RA until retirement.
The RA must, however, be a new-generation product which does not have contractual terms. There are two reasons for this, namely:
* Most life assurance companies’ RA products come with confiscatory penalties if premiums are not paid for a contractual period. The penalties apply if the employer or employee stops paying contributions.
* If the member remains unemployed for a period of time, his or her taxable income for the year could drop. This means all or a portion of the contributions will no longer be deductible from taxable income because of the limits on deductions from taxable income.
Another advantage of a retirement fund over an umbrella fund is that an RA member cannot cash in the proceeds on changing jobs before the age of 55. The money must be preserved for retirement.
When an RA is matured at or after the age of 55, two-thirds of the amount must be used to purchase a pension for life. One third can be taken as a lump sum.
An RA cannot be matured before age 55 in terms of the Income Tax Act but it can be kept running until any age. However, a product provider cannot force you to contribute to an RA until the age of 55.