Provident vs Pension vs RA

[Dr Who]

Hi All

As can be seen by the title which ones do you prefer and why? I understand that certain ones are employer based and RA's are individual based, and that their are tax benefits between the different options. But which one do you prefer and why?

This is more based on 2 outcomes one where you pay until retirement and one where you stop paying at a point. This question is also because my wife needs to decide which one to select. In a perfect world she would not work for a period while raising kids and hence this needs to be taken into account, also weighing up being tax efficient now vs implications on retirement between withdraw limitations.

This is like a mine field ( oh and throw in the pending changes on the horizon )

Thanks

 

[supersunbird]

Provident and Pension funds are employer based.

- Provident fund - allows you to withdraw all your money (if you want to) when you retire (taxed as per a schedule)

- Pension fund - allows you to withdraw up to 33.33% money (if you want to, taxed as per a schedule) when you retire, the rest must be invested in a pension generating annuity.

When you leave the employer you can access all the money in both types. This is a negative in my opinion.

RA is personal (although a company can contribute to it too I assume).

- allows you to withdraw 33.33% money (if you want to, taxed as per a schedule) when you retire, the rest must be invested in a pension generating annuity.

Can not access the money at all until 55 (except if officially emigrating or retiring before 55 due to medical issues).

2015

But not all of the above will not be applicable for much longer, they will change the rules of being able to take out all off the provident fund at retirement, for example. They are making Provident and Pension funds and RAs very similar to each other, from March 2015 in all likelihood.

They also want to enforce mandatory preservation of funds (or at least part of it) when people leave employment for whatever reason.

My case

Previous employer had a pension fund, that money went into a RA. Current employer has a Provident fund, if I leave or get retrenched that goes into a RA. I have a RA I contribute to monthly above the money going into the Provident fund.

 

[Dr Who]

Thanks for the detail supersunbird but this is the detail that I already new.

I am more trying to look into the future and establish which is better:

1) Paying more tax now for 100% withdraw benefit
2) Paying less tax now and being limited to 1/3

And then we you overlay that this individual may work for the next 30 years or may not so again we have to weigh up the cost/value of having or not having access to this money.

 

[TheMightyQuinn]

Put your money in the bank or even under your matress...

These retirement funds very rarely show growth these days. The only people "making money" are the guys selling them to you. A lot of these retirement funds are losing money so after 40 years you get less than you put in.

All this figures of projected growth are BS and used to lure you in.

 

[supersunbird]

If one is disciplined enough to not access the money for a car or want to invest it all in some ill fated business venture, then I guess one could pay more tax now to withdraw all later, but those funds will be accessible at any time.

The second tax benefit in the retirement vehicles is that the growth (dividends and such) in the fund is not taxed, and its protected from your own weakness as well as other creditors. One can construct a high growth portfolio in an RA* (but obviously there are limits imposed by Regulation 28).

Anyway, choosing between them will not be much different after March 2015. Also after March 2015 you will get up to a 27.5% tax benefit, instead of the 15% allowed now.

My personal opinion is to contribute at least 15% (20% better) into a retirement vehicle of some kind. Any investments above that, invest where you want and can get full access to it.

*only unit trust RAs should be considered, life insurance RAs are yuck, for lack of a better term.

 

[Dr Who]

Dear Mighty Quin

Have you had a look at the JSE of late? We are at record highs that being 47,000 points up from 27,000 at the lowest point after the financial crisis.

While all the Balanced funds which the monies have to be invested in have 75% equity 25% cash requirement all I can say is that any equity over the last 5 years would have returned significant gains. ( This may not be 100% true but its materially correct I am sure )

Yes the policies of old took the costs first ( and these were very high ) but this has been amended. Yes if you retired post the market crash luck was not on your side, but equity continues to perform in the long term. While I have never liked RA's/Pensions/Prov personally they do have a place and now days can lead to significant savings growth.

If I were to ask you where else to save if you dont believe is the above, what would you say? I love property but I also need to be open minded and at times property growth will lag inflation and thus you can leverage the short term gains from equity to your advantage.

Now as I near an uncertain economical future Property vs Equity I am hedging my bets and are in both ( pension due to force - per employment contract - Property out of choice) I feel somewhat relieved as I did not need to start thinking of buying for the sake of buying.

 

[Cius]

I find my RA fairly restrictive. Its locked into a set spread of funds and I can never change that without major penalties as I understand it. My provident fund via work on the other hand has several good funds available to me (Alan Grey, Coronation, Investec, Old mutual etc). Got my annual pension statement recently and my return last year was 22% after costs via Alan Grey's balanced equity. That was not even the best performer as Investec was close that level and the Coronation fund returned 30% last year. Granted that was an unusually good year but that is how much a good aggressive fund can return when the markets are moving up. Considering that I beat inflation by 16% I am very happy to keep my money in provident funds until I retire. My own self managed shares that I have in ETF's where completely flat this year and my 5 year return on them is about 11% (which is nothing to sneeze at) but still well bellow the Alan Grey funds 20 year average of 19.5% I think. That long term growth over a career of working is the only safe way I know of getting a decent pension together so make sure you do it!

Also try to put away at least 15-20% of your cost to company. I see that my company claims to be putting away 15% but its of this stupid new concept called "Pensionable Earnings". In reality its more like 12.5% of my cost to company and hence I pay extra into an RA as well as 12.5% is not nearly enough. I am hoping to eventually be saving 20% but am 3-4% short right now.

 

[^^vampire^^]

I currently have money in a provident preservation fund. Anything that gets contributed to a provident fund during my stay at a place of employment gets put there once I quit.

I also have 3 different RA's which I contribute to equally each month to diversify my risk and keep money protected from the vultures if, god forbid, something terrible happened to me financially. They are all unit trust based funds that allow me to stop and start contributions when and how I want without any penalty which is very important incase for some reason I can't contribute any more.

 

[supersunbird]

I currently have money in a provident preservation fund. Anything that gets contributed to a provident fund during my stay at a place of employment gets put there once I quit.

I also have 3 different RA's which I contribute to equally each month to diversify my risk and keep money protected from the vultures if, god forbid, something terrible happened to me financially. They are all unit trust based funds that allow me to stop and start contributions when and how I want without any penalty which is very important incase for some reason I can't contribute any more.

I am under the distinct impression that one is not allowed to put any additional money into a preservation fund (provident or pension). You have to open a new preservation fund for any new funds that need to be preserved.

The one "benefit" of preservation funds are that one is able to make a once of withdrawal from it.

 

[Billy]

Put your money in the bank or even under your matress...

These retirement funds very rarely show growth these days. The only people "making money" are the guys selling them to you. A lot of these retirement funds are losing money so after 40 years you get less than you put in.

All this figures of projected growth are BS and used to lure you in.

I suggest that you look at the returns on Allan Gray and Coronation over the past 20 years.

They do not employ Salesmen and the returns will be above any other that you can put forward in SA.

 

[^^vampire^^]

I am under the distinct impression that one is not allowed to put any additional money into a preservation fund (provident or pension). You have to open a new preservation fund for any new funds that need to be preserved.

The one "benefit" of preservation funds are that one is able to make a once of withdrawal from it.

I think you are correct in this as I moved my first provident fund to a preservation fund from my first job and when I moved my provident fund from second employer to the same preservation fund company and they opened a second account.

 

[Wynsam]

There is no substitiute for talking to Cerfified Financial Planner. They really know whats cooking. Go to www.fpi.co.za and do a search and visit a few of them. Most will not charge for the first visit where they will tell you about themselves and what they can do for you and at what cost. Vists a few, get some advice, decide who you like and follow their suggestions.

Yes its true you can do this own your own. Your financial planning that is. But why not see whats available and at what cost and what the potential benefits are of using a pro are?

Not many top sports stars got where they are with zero coaching or assistance. In like manner you will be amazed at how many very wealthy people make use of professionals to maximise their chances of further financial sucess.

 

[supersunbird]

There is no substitiute for talking to Cerfified Financial Planner. They really know whats cooking. Go to www.fpi.co.za and do a search and visit a few of them. Most will not charge for the first visit where they will tell you about themselves and what they can do for you and at what cost. Vists a few, get some advice, decide who you like and follow their suggestions.

Yes its true you can do this own your own. Your financial planning that is. But why not see whats available and at what cost and what the potential benefits are of using a pro are?

Not many top sports stars got where they are with zero coaching or assistance. In like manner you will be amazed at how many very wealthy people make use of professionals to maximise their chances of further financial sucess.

Its fine as long as the Certified Financial Planner doesn't try to sell products from Sanlam or Liberty or Momentum (and I am sure Old Mutual and Metropolitan and others can be added). Its all fine and well that they have collective investment products too, but they should scrap their outdated products totally so they cannot sell them, and learn how to calculate penalties and not try to change the definition of a penalty (as per article). In fact all their products should be boycotted until they show some ethics.

http://www.iol.co.za/business/perso...rs-seem-deaf-to-outcry-1.1640304#.Uu5-nxs4rYU

I wanted to open a SIM UT (EW Top 40), its got very reasonable fees, to help save up for someones (who is scrapping by) childs tertiary education in 8 years time. Now I'm having trouble reconciling myself with that decision due to the company involved, hell, I even want to cancel my Satrix since Scamlam own them too now and maybe even change my insurance away from Santam since Scamlam owns 60% of them. I'm getting tired of reading about them on these types of websites...

So yes, one has to research what you CFP recommend before going along with it, because they can be a rip-off as your signature says.