If you think that your employer’s pension fund is all you need to retire comfortably, you are definitely mistaken.
Retirement is a big topic these days, and many are talking about retirement savings, although it does not mean they understand everything, such as the difference between a pension fund and a retirement fund.
Only 6% of South Africans are expected to retire comfortably, while the majority are left depending on family or government grants just to get by. If that statistic does not make you think twice about your retirement, it should.
“Retirement is not just a financial event but a lifestyle transition. Too many South Africans think a pension fund alone is enough, but that is a dangerous assumption,” Paul Mafisa, business development manager at ASI Financial Services, says.
“If you are employed and contributing to a pension fund, you might think you are sorted for retirement. But that is just one piece of your retirement strategy. Retirement planning is about creating a sustainable income for life after work and that takes more than one savings tool.”
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Difference between a pension fund and a retirement fund
Mafisa says while people often use these terms interchangeably, it is important to know that a pension fund is a type of retirement fund, usually provided by your employer.
A retirement fund is a broader term that includes:
- An employer-based pension;
- Privately owned and flexible retirement annuities (RA);
- Preservation funds to keep your savings safe if you leave a job.
“A pension fund can give you a head start, but it is not always enough. Think of a retirement annuity as your backup engine and every journey needs one. It is important to also understand that you can only belong to a pension fund if you are part of an employer group,” Mafisa explains.
Pension funds are structured, professionally managed and cost-effective and great if you are employed. But they have these limits:
- They depend on how long and how consistently you contribute;
- They may not offer enough flexibility to max out your tax benefits.
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Retirement fund annuity
This is where retirement annuities come in, offering flexibility, continuity and tax efficiency even if you are self-employed or between jobs.
“Combining an employer pension fund with a personal retirement annuity is one of the smartest ways to build a resilient retirement strategy.”
Mafisa also points out that the Income Tax Act allows any employee who belongs to a retirement fund to contribute the lower of R350 000 or 27.5% of taxable income to a retirement fund. This benefits an employee as whatever they contribute to a retirement fund reduces their taxable income while saving money for post-retirement.
Who manages your money? Mafisa says it depends on the type of retirement fund you choose. All retirement funds are managed by authorised providers or financial institutions offering retirement annuities. These providers must be registered with the Financial Sector Conduct Authority (FSCA) and are licensed to manage your funds.
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Different stages of your life for retirement
What to do at different ages:
- In your 20s/30s: Open a retirement annuity even with just R500/month. Time is your biggest advantage.
- In your 40s/50s: Top up your pension with an RA and consolidate old savings into a preservation fund.
- Near retirement: Work with your fund manager to create a secure, income-producing plan for your later years.