General Benefits Information

Group Benefits - General Benefits Information

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In today's highly competitive business environment, employers depend extensively on the value and expertise brought into their organisations by their employees. The pension or provident funds become a primary tool in the manifestation of the company’s corporate asset savings.

Our group benefit packages are tailored to the requirements of the client and the members. Essentially retirement funds are established for the accumulation of funds for retirement. Additional benefits such as life cover, disability and dread disease cover are added, this is done frugally so that the main concept of the fund is not negated. We can manage funds with as few as 5 members to as many as 1000 members.

Pension and Provident Funds Explained

Introduction to Retirement Funds

In today's highly competitive business environment, employers depend extensively on the value and expertise brought into their organisations by their employees. In fact it wouldn't be unfair to say that employees by far represent a company's most valuable asset. In view of this, employers find themselves in a position where they are not only expected to provide some form of retirement funding arrangement but the added fact that the state cannot afford any worthwhile form of social benefits, adds social and moral pressure to employers to get them to assist with the provision of benefits for their staff and dependents in the event of death, disability and retirement. Experience shows that the implementation and maintenance of a comprehensive employee benefits program adds extensively to a company's ability to attract high quality employees and, once engaged, ensures that these staff members provide the company with an extensive and valuable term of service.

Life and disability cover can in most instances be secured at extremely competitive rates via a group scheme, added to which the benefits of bulk underwriting ensure that members of the scheme who under normal circumstances may be uninsurable, will able to secure a minimum level of cover.

An umbrella fund is a retirement fund which can be either a pension or provident fund. Umbrella funds are generally created for the benefit of the employees of different companies/employers who have no relationship with one another. Companies who join these umbrella funds on behalf of their employees are called participating employers. Umbrella funds can only be administered by professional administrators who are registered with and approved by the Financial Services Board (FSB).In terms of FSB Board Notice 36, an umbrella fund can be defined as follows: “A fund in which – more than one employer participates the assets and liabilities in respect of the members employed by each participating employer are maintained separately from those in respect of the members employed by other participating employers the financial position is determined separately in respect of the members employed by each participating employer” Although each participating employer along with their employees enjoys the economies of scale and benefits of a large fund, each employer and their respective members are effectively administered on an individual basis.

Despite the overall “pooling” of participating employers, it is important to note that assets are held in separate account for each participating employer and funds held on behalf of members of a participating employer shall not be used to enhance benefits of members/former members of other participating employers.

In addition to basic retirement savings, life cover benefits, and lump sum disability benefits can also be provided through a pension or provident fund. In addition to the above, Disability Income Benefits (also known as Phi & Income Security) can be provided as a rider to the Pension or Provident Fund. Although not technically part of the benefits provided by the fund, Disability Income Benefits are often provided seamlessly as part of the total employee benefits offering.

Other Benefits Available:

  • Funeral Benefits
  • Dread Disease (Severe Illness) Benefits
  • Temporary total disability
  • Accidental Death/Disability cover

Statutory and Tax Provisions

A provident fund is a retirement benefit which differs from a pension fund in that at retirement the entire benefit may be taken as cash. No tax relief is allowable on member contributions.

Provident Funds are governed by the Pension Funds Act.

Defines a pension fund organisation as any business carried on under a scheme or arrangement established with the objective of providing annuities or lump sum payments for persons who belong or belonged to that class of persons for whose benefit that scheme or arrangement has been established, when they reach their retirement dates or for dependants of such persons upon the death of those persons.

The fund must be permanent and bona fide. The rules of the fund must provide for the following Annual contributions must be paid in accordance with specified scales. Membership is compulsory throughout employment for all eligible employees engaged after the date of inception of the scheme. Existing eligible employees must have the option of joining the scheme not later than 12 months after commencement date. The scheme must be administered in such a way as to preclude the employer from controlling the management of assets or deriving any monetary advantage. Not more than one third of the benefit at retirement may be commuted for cash except where the annual amount of the annuity is less than R 1800.

All amendments to the rules must be notified to the Commissioner for Inland Revenue.

Taxation of Retirement Funds

In order to encourage saving through private retirement vehicles, South African Revenue Services provides tax payers with a number of tax concessions. These include the allowance for members to deduct contributions (subject to certain limitation) to these vehicles from their taxable income, as well as by providing a favourable tax treatment of benefits taken from these funds in the event of retirement, death and withdrawal. In addition to this, SARS allows for a somewhat favourable tax treatment of investment roll up within the fund. 

These concessions are currently under review however are applicable until further notice:

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Retirement Reform 

This communication serves to inform you of the Taxation Laws Amendment Act 2013 (TLAA) changes that will become effective on 1 March 2015.

These changes form part of Government’s retirement reform proposals. The below changes are designed to harmonise the tax treatment and annuitisation requirements for all types of retirement funds in South Africa (pension-, provident-, and retirement annuity funds). These changes also:

  • Encourage employees to save and provide adequately for retirement to ensure that they retire comfortably and have income that lasts for their lives in retirement.
  • Encourage employers to provide retirement saving plans to their employees as part of the employment contract.
  • Ensure that employees receive good value for money for their retirement savings and are treated fairly, and that their savings are prudently and diligently managed, and are kept informed of their retirement savings.
  • Improve standards of retirement fund governance, including trustee knowledge and conduct, and the protection of members’ interest.

The changes that will become effective on 1 March 2015 have been summarized in a table at the end hereof for your ease of reference. These changes can also be summarized as follows:

The insurer generally allows a member to join a fund subject to medical evidence of health only above the threshold set at the outset and no evidence of health is required on sums insured below this set level. This is of course of particular importance to employees with some or other health problem that precludes them from purchasing unloaded insurance within the free market. Not only is this insurance available, but also competitively priced, and in most cases is the only cover that employees have, to provide some financial comfort to their families.

Impact on employers

  • Employers will no longer be limited to a maximum deduction of 20% of pensionable income. Employers will be able to claim unlimited deductions for contributions made to retirement funds.
  • Employer contributions to provident funds will be taxed as fringe benefits in the hands of employees.
  • You should ensure that your payroll systems are geared for these imminent changes.
  • We submit that your various options after 1 March 2015 will entail the following:
    • All contributions can be made by the employer, as there is no longer a need to separate employee and employer contributions for deductibility purposes. Also, you as the employer will have an unlimited deduction for these contributions.
    • It is also possible for the retirement fund contribution structure to provide for employee contributions only, or to continue with current existing employer/employee splits.
    • The provident fund contributions rate must align with terms set out in employment contracts, as well as the special rules of the participating employer.
    • The employer must engage with the provident fund with regards to the costs of the fund’s risk benefits. This is because the R 350,000 maximum deduction allowed to employees, include the costs of the risk benefits associated with the fund also.
  • The distinction between gross retirement funding employment income, and gross non-retirement funding employment income will become irrelevant.
  • Deductibility now depends on the highest of "taxable income" or "remuneration". Total taxable income is only determined at the end of the tax year (i.e. on assessment), so it will be easier for an employer to determine a deduction based on total "remuneration".
  • An employer will, however, know what the value of the employee's "remuneration" will be, and in particular, the employee's "fund salary" as defined in the fund rules. Therefore, the employer will be in a position to determine the employee's deduction with reference to the employee's "remuneration".
  • We believe that this ensures a simpler salary and retirement fund contribution structure in the end, although it requires changes in the short term.

Impact on employees/members

  • Although employer retirement fund contributions will be subject to fringe benefits tax in members' hands, employers can apply the employer and member contributions (up to the new deductible limits) as a deduction against the value of the fringe benefit. This corresponding deduction will take place monthly and means that most employees/members will be in a tax-neutral position.
  • It is key to note that fringe benefits tax will only become payable should the employee/member contribute in excess of the new deductibility limits (27.5% of the greater of remuneration or taxable income, with a ceiling of R350 000 per annum). Any contribution in excess of the new deductible limits can be rolled over and claimed as a deduction in subsequent tax years. In addition, the portion of contributions that is not deducted during the member's lifetime can be taken out as a tax-free payment at retirement, either as part of the retirement fund lump sum or as an exempt portion of an annuity.
  • The new deductibility limits effectively entitle members to a bigger deduction, as the base on which the contributions are calculated has increased. Currently, most retirement fund contribution rates are based on "pensionable salary" and the revised base is now total remuneration or total income.

  • We view these proposed changes as positive changes that will eradicate uncertainty and facilitate a uniform approach to taxation of provident fund membership in future.
  • We are engaging with the various role players and will visit you in order to discuss practical implications of these above proposed changes later during the course of this year.

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Why a Provident Fund?

Moral obligation

In a world which is moving from a strictly legalistic, hands off environment to an equity based socially responsible setting, the pension or provident fund becomes a primary tool in the manifestation of the company’s social contract. The employer cannot abdicate responsibility for its employee's well-being, and needs to have a cohesive, functional and appropriate plan in place as confirmation of this. A provident and /or a medical funding scheme are the most appropriate means of delivering such a plan.

Competitive advantage

Attracting and retaining skilled staff, especially in an expanding economy is difficult enough. Prospective and current employees often evaluate their remuneration package not only on the "take home" pay but also on the structuring of their package. Contemporary human resource management needs to find new as well as established methods of appealing to its workforce. Provision for retirement, death, disability and funeral costs are often not only a requirement, but a most appropriate way of satisfying basic human needs.

The insurer generally allows a member to join a fund subject to medical evidence of health only above the threshold set at the outset and no evidence of health is required on sums insured below this set level. This is of course of particular importance to employees with some or other health problem that precludes them from purchasing unloaded insurance within the free market. Not only is this insurance available, but also competitively priced, and in most cases is the only cover that employees have, to provide some financial comfort to their families.

  1. Appropriate pension provision
  • Appropriate pension fund provision is the most important aspect of a Retirement fund, and due consideration must be given this aspect of a fund. Adequate funding needs to be provided if any tangible benefit is to be derived by the employee.

  1. Appropriate risk benefits
  • There are the traditional risk benefits available, such as life cover, disability cover, income protection and funeral benefits, but also new and innovative add on products such as dread disease benefits and education providers for children on the death of a parent.

  1. Reasonable costs
  • Costs are uppermost on the financial manager's mind, and also on that of the employee. To this end, we ensure that you receive cost effective, value for money purchase schemes, and we constantly monitor the markets to ensure that these are appropriate. Costs relate to taxation, administration and fund management.

Pension and provident funds generally provide an adequate menu of funds to satisfy most risk appetites. One can follow an appropriate risk profiled strategy that caters for differentiated age groups, or allow strategy: it can be accommodated within the ambit of a pension/provident fund. A further advantage is that fund management becomes available at wholesale pricing to individuals who could not access this individually.

  1. Trustee liability and outsourcing. Professional trustees are appointed.
  2. Costs are about 20% cheaper.
  3. Fund availability.
    • External fund managers
    • Expert asset allocation
    • Balanced funds appropriate for the business cycle
  4. An opportunity to refocus the fund on its primary objective, namely Retirement benefits.
    • Introducing more pertinent and appropriate benefits such as;
    • Dread disease cover
    • Progressive income protection benefits
  5. Funeral benefit
  6. Individual educator benefit
  7. Removal of any discriminatory practices in the fund.
  8. Streamlined administration

 

Options on the withdrawal of Investment - Pension and Provident Fund

Withdrawal of the accumulated investment portion of your pension or provident fund is only permissible under the following circumstances:

  1. Resignation or dismissal
  2. Retirement
  3. An insured event (death/disability)

At this point, you need to make an informed decision as to what you wish to do with the funds:

  1. Withdraw the cash or
  2. Preserve the accumulated benefit

Please note that both instances, your tax affairs must be in order.

When deciding to preserve benefits, you have a few choices and these are listed below:

  • Transfer to another Company’s Pension/Provident Fund
  • SARS tax clearance required
  • Advise Administrator timeously of details, but in any event, prior to final workday.
  • Funds are converted to cash and transmitted to the new fund, and take on the asset allocation of that fund.

Capital Preservation Fund

  • SARS Tax clearance required.
  • All paperwork to be submitted prior to your last working day.
  • Can be invested with most life companies and investment platforms.
  • One withdrawal allowable prior to retirement.
  • Flexibility in investment choice and asset allocation.

Retirement Annuity

  • SARS clearance required.
  • Flexibility in investment choice.
  • No withdrawals prior to retirement.
  • Choice in respect of platforms available, whether insured (life companies) or uninsured. (Unit trust type investments)
  • Applications must be submitted to the administrator prior to your departure.

The default withdrawal mode per SARS rules is a cash pay-out unless otherwise stated on your withdrawal form.

Preservation Funds Explained

Retirement preservation funds are approved umbrella pension or provident funds to which members of an existing employer's pension or provident fund can transfer their accumulated benefits on termination of service. A preservation fund preserves the benefits received from the pension or provident fund that the member is leaving, without tax disadvantages, as transfers from a pension or provident fund to a retirement preserver are tax-free, as long as certain requirements are met.

Any member that is withdrawing from a fund as a result of resignation, dismissal, retrenchment or a fund termination. Retirements or mergers of funds do not offer this option. Owing to the nature of the preservation funds, only monies from a pension fund can transfer to pension preservation fund and provident fund monies to a provident preservation plan.

Firstly, it is important that the existing employer is a participant of the preservation fund that a member wishes to transfer his benefits to. Any new fund applies for participation at installation stage. A minimum transfer value of R12 500 is required to transfer to a Preservation Fund. Previously, details of the 'N' Factor were also important at the time of setting up the preservation fund policy. This 'N' Factor was the number of years of service/membership with the fund. This factor was used to determine the tax implication at retirement age. Please see details of the new tax regime on this website.

In most cases, prior to the pension fund receiving the withdrawal notification, the member has already contacted his financial adviser and made arrangements to transfer his value to the preservation fund. However, the exiting fund requires the name of the fund, contract number and bank account details of the receiving fund. It is important to include a contact person in order to ensure that recognition of transfer form is completed and kept on record.

Transfers to a Preservation Fund will take up to 20 working days. The reason for this is that the two divisions have separate bank accounts. As a result money is paid to the Personal Benefits division by an overnight batch run after being authorised. Thereafter it goes through another overnight batch run to be allocated to the Personal Benefits account and then into the particular policy. Therefore it is imperative that the timing of these transfers takes the above process into account.

There are no tax implications on a transfer to a preservation fund. However, the fund administrator has to apply for a 'nil' directive prior to the transfer. Therefore it is still important to furnish the member's tax details. Are members allowed to make additional contributions to a preservation fund? No additional contributions are allowed to a preservation fund, unless the monies are derived from the original fund as a result of surplus distributions etc. What are the options available before and after transfer from a pension or provident fund? Before transfer: A member may not take a portion in cash and transfer the balance to a preservation fund upon withdrawal from a pension or provident fund. However, deductions made in terms of Section 37D of the Pension Funds Act are allowed prior to transferring to a preservation fund. It is important to note that these deductions will then be deemed to be the one withdrawal as discussed below. After transfer: Provided that the rules of the transferring fund allow it, the preservation fund rules allow the member the option of a single withdrawal of all or part of the accessible portion of the preserved benefits prior to retirement, subject to the payment of tax and withdrawal charges where applicable. The balance of any remaining benefit will not be available until retirement. Please note that this part or full withdrawal would be subject to tax.

The payment of benefits will be treated the same way as that of a retirement from a pension or provident fund, namely, a maximum 1/3rd in cash and 2/3rd annuity for a pension fund and the full amount paid in cash for a provident fund. Please note that at official retirement from all employment, a member has to retire from his preservation funds too. However, if he is still working at normal retirement date of a particular preservation fund, he may not retire from that preservation fund. Practical issues to consider when setting up preservation fund policy.

Accessible amount: Accessibility effectively means the amount of money that can be taken out as a part or full withdrawal prior to retirement date. An example of this is if the member was entitled to a vesting scale on withdrawal from his original fund, this portion would be the accessible amount i.e. the amount the member would have received had he withdrawn his benefit from the fund. The difference between this (the accessible amount) and the full share of fund would remain in the preservation fund until retirement. It is extremely important to ensure that the accessibility conditions are made clear at the installation stage of the policy. Often, at withdrawal stage members are faced with inaccessible portions as a result of inaccurate information being supplied at inception of the preservation policy. This therefore requires trustee resolutions etc. to change the accessibility conditions and could delay the payment of benefits from the preservation fund considerably. Changes in legislation with regard to minimum benefits now forces all funds to pay out the member's full share of fund at withdrawal. Therefore, all benefits for any new policies should be loaded as fully accessible on the preservation policy. However, some funds may not have amended their rules at this stage, so it is best to check first

 

With acknowledgement to Liberty Life

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106 Nicolson Street, Brooklyn, Pretoria/ Tshwane, South Africa
012 004 0380

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