Retirement annuities versus pension and provident funds - which is better for you?

It makes sense to save for retirement in investment vehicles specially designed for the purpose of securing your financial future in retirement - but how do you know which one is best suited to you? Here are some features that can help you decide.

The perks of pension and provident funds

Pension and provident funds are workplace based plans that are offered as a company benefit. Employers don't have to offer these funds, but if they do, it's compulsory for employees to join when they join the company if it is a condition of your employment.

1. They take the constant decision making out of saving now for later

If you join a pension fund at a new company, the amount you contribute will depend on your package with them and your Cost To Company (CTC). Your CTC refers to the entire amount a company is willing to pay for you. This is different from your nett salary, which is your take home pay after deductions like tax and medical aid. You may have a range of options where you can choose what percentage of your CTC you want to allocate to your pension or provident fund.

It's smart to take advantage of your company's pension or provident funds by contributing as big a percentage as you can afford. Remember, it's still your money, it's just being allocated to your future and you'll be very glad for this once off decision when you retire!

2. There can be great tax benefits

Saving in a pension or provident fund is tax-deductible up to a certain level. Compared to saving in a bank or a unit trust, every rand you put in is effectively boosted by whatever your tax rate is. So if, for example, your tax rate is 30% and you have R1 000 to invest, you're left with just R700 after tax if you put it in the bank. But by putting it into your retirement fund, the full R1 000 (minus admin costs) goes in.

3. They're affordable savings vehicles

Pension and provident funds are probably the cheapest way for you to save. Because your company arranges it on behalf of all employees and the costs are pooled together, the cost of administering these products may be low, and the fees you pay may be low in turn. Just remember to preserve your funds if you ever switch jobs, instead of cashing out and losing your gains.

The rewards of retirement annuities

Firstly, anyone can buy a retirement annuity (RA). You may be employed by a company, or self employed, and you can have a retirement annuity in addition to a pension or provident fund or both. There are a couple of reasons why retirement annuities appeal to those who want to save for retirement:

• Retirement annuities have become popular in recent years due to the flexibility they offer. While pension or provident fund contributions are often based on a fixed percentage, retirement annuities let you change your contribution amounts over time.
• Retirement annuities usually offer access to a wider range of funds than pension and provident funds. This is because pension and provident funds are set up by employers who generally select funds that make it simple for their specific members, while retirement annuities try to accommodate the needs of everyone in the market.
• If you're going through a financial rough patch and need every extra rand, you can temporarily pause contributing to your RA, and then reinstate contributions within six months. With a pension fund, you have to contribute for as long as you remain employed.
• Retirement annuities are highly effective estate planning tools. The proceeds are exempt from estate duty, capital gains tax and executor fees because the cash amount can be paid directly to beneficiaries and/or dependants once the Trustees of the retirement annuity fund have made a decision. That said, the laws here are complex, so get professional advice before you use a retirement annuity for estate planning.

This article is not financial advice. Please consult with a financial adviser for financial advice.