The road to the perfect retirement plan is full of signposts pointing in different directions. So find out what they mean before choosing your route.
The most important person in a fund is you, the member. The money that’s yours, is the benefit. Withdrawal is accessing your benefit before you retire.
A retirement fund is a plan to help you save. The set amount you pay monthly is invested and will give you a steady income after retiring.
Some companies have a pension fund. Your contribution from your monthly salary is tax-deductible – it comes off your taxable income. When you retire, you can take up to one third of your benefit in cash – maybe for varsity fees or to reduce your bond – but you must reinvest the rest.
With a provident fund, a company also takes a contribution off your salary. No tax break here, but when you retire, you can take all in cash or reinvest it.
Both of these can be a defined benefit fund. Your benefit is worked out according to how long you’ve been a member and other factors. You know how much you’ll get and if the fund underperformed, your employer has to pay the shortfall.
A pension and provident fund can also be a defined contribution fund. Your benefit is your and your employer’s contributions, as well as the investment’s growth. If it didn’t grow much, you take the loss.
A retirement annuity is a policy you hold personally. The benefit is based on your monthly contributions and growth or loss.
If your benefit is paid out, what should you do with it?
In a preservation fund you keep the tax benefits of a retirement fund, while an annuity provides retirement income. An annuity is available from retirement age and preservation when you leave the fund. The level annuity might pay more, but the amount doesn’t change. An inflation-linked annuity pays more as inflation rises. The with-profit annuity gives you a share of the investment profit. With a fixed escalation annuity your pay-out increases by a fixed amount each year.
With a living annuity, or investment-funded annuity, you decide how much you get per month. It pays only as long as the money lasts, so you could outlive your funds.
What will work best for you? Ask an expert. Based on your needs, an Old Mutual financial adviser will work with you to find the path to your ideal retirement plan. Talk to one today.